Employee Stock Option Plan [ESOP]

Rise together.

Provide the strongest incentive for your best employees to stay motivated and stick around.

Benefits

A talented and highly motivated team.

  • 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 two to three years you have defined as vesting period.

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Procedure

Prepare, allocate, implement.

  • Grant Notice
  • Option plan
  • Allotment and documentation
  • Options agreement
  • Business valuation
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How LawDocs will help?

A few documents and a littlie details.

  • Initial legal and regulatory on drafting the ESOP scheme
  • Assisting on valuation
  • Preparing notices, Board resolutions and minutes for getting ESOP approved in Board Meeting
  • Drafting necessary resolutions and minutes for Shareholders meeting for passing the special resolution regarding ESOP
  • Filing MGT 14 with MCA
  • Advise on the ongoing compliances and filings with MCA to be done by the company as and when shares are allotted
  • Any other service required to facilitate smooth execution of aforesaid.

Why LawDocs?

Only option to provide all business services.

  • Stock of all business activities.
  • We design suitable plan for the employees.
  • Long experience of dealing with such matters.
  • A real plan to lower down attrition rates.

FAQs

Yes, ESOPs are completely legal. SEBI, Income Tax Act and Companies Act are several corporate and legal compliances related to the ESOPs.

Promoter is someone who is in overall control of the company and has played helpful role in the formation of the company. The name of all promoters is mentioned in the offer document and a promoter is not eligible to avail the ESOP benefit.

No. ESOPs are valid only till the exercise period or when the employee terminates his services in the company; after that, they cannot be converted into shares. This is usually specified in the ‘Letter of Grant’.

No. A simple granting of ESOP does not make you a shareholder. You have to pay the exercise price to exercise your option and transfer it into stocks/shares. Only then will you be a shareholder.

Yes, provided that there is a provision regarding this in the company’s Article of Association.

Accounting is the process of accessing, measuring, recording, classifying, verifying, summarizing, interpreting and communicating financial information. It provides information on operational efficiency and other financial aspects of the business. The end product of accounting is financial statements which provide a basis for decision making.
  • Pricing.
  • Lock-in period, vesting and exercise of options.
  • Nontransferability of stock options.
  • Certificate from Auditors to be obtained for the same.
  • Preferential Allotment.
  • Who are the employees to whom the ESOP will be applicable
  • What happens to vested shares if the employee leaves before exercising
  • What happens to unvested shares if employee dies
  • Communication to employees about TDS to be deducted
  • Mention of the exercise price

The employees who are eligible to get the ESOPs are:

  • Permanent employee of a company irrespective of where he works except the employee who is a promoter i.e who holds shares
  • Directors of a company, whether whole time director or not, but excluding an independent director (Director who holds more than 10% shares is not eligible for ESOPS)

Under the Employee Stock Option Plan (ESOP), the company grants its employees an option to buy a certain number of shares at a predefined price which is usually lower than the market price. ESOPs in India are governed by the Companies (Share Capital and Debenture) Rules, 2014. ESOPs are common among early-stage start-ups. From a start-up’s perspective, these are the steps to offering an ESOP-

  • First of all, the company drafts an ESOP scheme and gets it approved in a shareholder’s meeting. Previously, this scheme required an approval by a ‘special resolution’ and filed with the Registrar of Companies, thereafter. But with effect from 5th June 2015, private limited companies do not have to comply with this rule.
  • After approval of the ESOP scheme in a shareholder’s meeting, a ‘Letter of Grant’ should be issued to the concerned employees. This letter should contain information about the number of options granted, vesting period, calculation of the exercise price, etc. One should note here that options are not shares; it is just the right to own shares.
  • If an employee wishes to exercise this option granted to him by the sponsoring company, he needs to make an ‘Exercise Application’. After this, his options will be converted into equity.

Employees also enjoy several benefits of an ESOP:

  • ESOPs definitely bring financial benefits to the employees in the form of higher pay, benefits and overall wealth generation. It also allows a comfortable retirement for them.
  • Holding the shares of the company, they feel more responsible towards the organization. They actively participate in the company’s decision making processes which, in turn, make them more optimistic towards the organization.
  • As a combined effect of monetary and non-monetary benefits, ESOP gives better job security and job satisfaction to the employees.

ESOPs are a form of aligned incentives. They create ownership interest among employees so that they work together for the common goal of company growth. This leads to a highly motivated workforce that wants to achieve more so that their organization’s share value appreciates. All other benefits that a company enjoys are related to the same fact. Researches have shown that after exercising their ESOPs, employees show more loyalty to the company. They work in harmony to reduce wastage in the organization and brainstorm on finding new ways of increasing productivity. ESOPs also increase the employees’ trust in the management and the company itself.

Employee stock ownership plans is considered as perquisites with respect to taxation.. On the other hand, for an employee, ESOPs are taxed at two below-mentioned instances –

While exercising – in form of a prerequisite. When an employee exercises his option, the difference between Fair Market Value (FMV) as on date of exercise and the exercise price is taxed as a perquisite.

While selling – in the form of capital gain. An employee might sell his shares after buying them. In case he sells these shares at a price higher than FMV on the exercise date, he would be liable for capital gains tax.

The capital gains would be taxed depending on the period of holding. This period is calculated from the date of exercise up to the date of sale. Equity shares which are listed on the recognized stock exchange are considered as long-term capital if they’re held for more than 12 months i.e. 1 year. In case the shares are sold within 12 months, these are then considered as short term. Presently, long-term capital gains (LTCG) on the listed equity shares are exempt from tax. However as per the recent amendments in Budget 2018, Sale of equity shares that are held for more than a year on or after 1st April 1, 2018 would attract tax at the rate of 10% and cess of 4%. Short-term capital gains (STCG) are taxed at a rate of 15%.

Promoter is someone who is in overall control of the company and has played an instrumental role in the formation of the company. The name of all promoters is mentioned in the offer document. A promoter is not eligible to avail the ESOP benefit.

No. ESOPs are valid only till the exercise period; after that, they cannot be converted into shares. They may also expire when the employee terminates his services in the company; this is usually specified in the ‘Letter of Grant’.

No. Mere granting of ESOP does not make you a shareholder. You have to pay the exercise price to exercise your option and convert it into stocks/shares. Only then will you be a shareholder.

Yes, provided that there is a provision regarding this in the company’s Article of Association.

Yes, ESOPs are completely legal and there are several corporate and legal compliances related to the ESOPs. SEBI, Income Tax Act and Companies Act regulate different aspects of ESOPs.

There are no set rules regarding this. This depends on the employees’ expectations, level of employment, etc.

Yes. It can be changed. In most of the cases, such changes are in favour of the employees.

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