Attract Top Talent

You may not be able to match their current salary, but an offer of shares in your company will be enough to attract the best talent.

Build Motivation

The better your business performs, the better your most talented employees will get paid. There's no better way to motivate them.

Keep Them Longer

The employees to whom shares have been allocated are almost certain to complete the four to five years you have defined as vesting period.

Who is eligible for ESOP?

According to the IRS (Indian Revenue Service), the maximum age an employer can impose to be eligible for an ESOP is 21. Moreover, he/she must be eligible for ESOP in the year of joining the company. An employer can restrict eligibility to employees with two years of service but only if the plan has immediate vesting.

How to structure an Employee Stock Option Plan

• Determine whether other owners are amenable.
• Conduct a feasibility study.
• Conduct a valuation.
• Hire an ESOP attorney.
• Obtain funding for the plan.
• Establish a process to operate the plan.

How to register an Employee Stock Option Plan

Draft The ESOP Rules

Your ESOP rules set out the terms that apply to all options granted under the plan, including the process for granting options, how and when employees can exercise their options, and what happens to the options on an exit event, or if an employee leaves. The document will include the following schedules:

• Schedule 1: A grant letter setting out the terms of the options you want to grant to recipients.
• Schedule 2: The form of the exercise notice to be delivered to the company when an option holder wants to exercise their vested options.
• Schedule 2: The form of the exercise notice to be delivered to the company when an option holder wants to exercise their vested options.
• Schedule 3: An option certificate which records the number of options, exercise price and vesting provisions.

Approve The Rules And The Option Pool

Once you are satisfied with the ESOP rules, your directors and shareholders will need to sign some corporate approval documents to adopt the ESOP rules and set up your option pool.

Board And Shareholder Approval

There are some resolutions which include:

• The approval of the Employee Stock Option Plan rules.
• The total number of options in the ESOP pool.
• Authorization for the board to grant options to recipients of their choosing, and
• Authorization to issue shares on any exercise of the options.

Shareholder Waivers And Consents

Your constitution and shareholder’s agreement may include pre-emptive rights on the issue of new shares. If this is the case, these shareholders with preemptive rights will need to sign a waiver in respect of any options granted the ESOP.

Grant your options

Prepare Your Directors’ Resolutions:

Each time you want to grant options, you should ask your corporate secretary to prepare a new set of directors resolutions in writing, approving the grant of options to a specific recipient.

Send Each Recipient Their Grant Letter:

• Once you have received the letter, you can issue them their option certificate. You can find the option as the certificate form in schedule 3. Here the schedule should be left blank and a separate option certificate provided to the recipient. That is, you need to create a fresh, separate word doc.

Update Your Register Option

Internally, you should also be keeping an option register, which is a record of all the options the company has granted, the vesting schedules, expiry dates, and exercise dates.

Documents required for Employee Stock Option Plan

• Minutes of a board meeting.
• Special resolution approving ESOP along with the explanatory statement.
• Minutes of the general meeting.
• Boards report.
• Register of employee’s stock option plan.
• PAS- 3, MGT- 14.