Importance of Valuation in Share Incentive Plans

A Share Incentive Plan (SIP) is a tax-advantaged, all-employee program enabling companies to award equity flexibly. Under a SIP, shares are held in a trust, offering tax efficiency for both employers and employees when held for at least five years.?

The plan includes free shares, partnership shares bought through pre-tax deductions, matching, and dividend shares.

?SIPs develop employee retention, aligning their interests with company goals and promoting long-term commitment.?

* Here is a table showing the growth of SIP Over the past five years.?

As you can see, the SIP AUM has grown at a CAGR of 27.32% over the past 5 years. This is a significant growth rate, and it is driven by a number of factors, including increasing investor awareness of SIPs, the rising popularity of mutual funds, and the strong performance of the Indian stock market.

How do you currently incentivize and retain key talent in your company?

Why does SIP Valuation matter?

Valuation is an important aspect of Share Incentive Plans (SIPs), ensuring equitable distribution of company shares among employees. It involves determining the value of the shares, a crucial step in designing effective and attractive incentive programs.?

Various methods, such as asset-based, income-based, and market-based approaches, are employed to assess share value.?

Accurate valuation safeguards fairness and transparency in SIPs, aligning the incentive structure with the company's financial health.?

The Importance of Valuation in Share Incentive Plans

Valuation in a Share Incentive Plan (SIP) is important in determining the true worth of company shares allocated to employees.?

• Accurate valuation ensures fairness, transparency, and compliance with regulatory standards.?
• Valuation directly impacts the perceived value of the incentives offered, influencing employee morale, commitment, and a sense of ownership.
• Employers use valuation to design incentive plans that are not only competitive but also effective. Understanding the true value of shares allows companies to structure plans that genuinely motivate and reward employees.
• A precise valuation is essential for optimizing tax advantages associated with share incentive plans. Employers can strategically implement plans offering tax benefits for the company and participating employees, fostering a tax-efficient approach.
• Accurate valuation aids in precise financial reporting, providing a clear picture of the company's financial health. This transparency is vital for regulatory compliance and building trust among stakeholders.

A well-structured valuation in share incentive plans can provide employees with tax-efficient options, minimizing the tax burden on the benefits they receive through equity participation.

Methods for Valuation Of SIP

Several methods come into play when determining the value of shares in a SIP. Let's explore three primary approaches:

1. Asset-Based Approach:

• Ideal for capital-intensive companies with substantial investments in assets.
• It considers the net value of all assets, including current, fixed, and intangible assets.

• Divide the net asset value by the number of equity shares to arrive at the value per share.

Value per share = (Net Assets – Preference Share Capital) / (No. of Equity Shares)

1. Income-Based Approach:

• It emphasizes the future benefits that the business will generate.
• It utilizes methods like Discounted Cash Flow (DCF) or Price Earning Capacity (PEC).
• It calculates the value per share based on the company's available profit for distribution and a capitalization rate.

Value per share = Capitalized Value / Number of shares

1. Market-Based Approach:

• Draws on share prices of publicly traded companies or comparable private company transactions.?
• It involves methods such as Earning Yield and Dividend Yield for valuation.

Value per share (Earning Yield) = Expected Earning / Normal Rate of Return

Value per share (Dividend Yield) = Expected Dividend / Normal Rate of Return

Ensuring Fair and Attractive Plans

Share Incentive Plans (SIPs) improve employee engagement and motivation, aligning their interests with the company's success. A well-structured and equitable SIP, supported by accurate valuation, enhances employee commitment and contributes to the organization's overall success.

For example, A company has 1,000,000 outstanding shares, and the last external funding round valued the company at $10 million. Let's break down the SIP valuation:

Now, with a valuation per share of $10, the company can design its SIP.

Suppose the SIP grants employees the right to purchase shares at a discounted price, say 20% less than the current valuation per share.

Here, an employee gets a $8000 value of shares, which is fair and attractive.?

This process aligns the interests of employees with the overall growth and valuation of the company. The SIP valuation ensures a fair and transparent mechanism for employees to participate in the company's success.

What criteria do you prioritize when selecting a valuation service for your SIPs?

Connect Eqvista for Precise Valuation in Share Incentive Plans

Considering Share Incentive Plans (SIPs) for employee engagement? Start with an independent valuation—it's crucial. SIPs offer tax-efficient ways to involve employees. A valuation determines share value and tax treatment when setting up a scheme, ensuring it aligns with the business.?

Eqvista's expertise can guide companies through this essential valuation process, ensuring its alignment with business objectives and employees' needs.Explore the extensive features of our software by delving into further details. Contact us today and discover how Eqvista can enhance your equity management experience.