How to Issue ESOPs to Your First 10 Employees or Founding Team Members

Step 5: Bringing ESOPs to Life

Now, you are all set to execute your ESOPs plan. Start granting ESOPs to your first ten employees. Go the extra mile by keeping track of ESOP allocations and share prices with our Google sheet template to track ESOP allocations (downloadable). Keep them updated! Just plug in the data, and you're good to go.

Conclusion

ESOPs are surely tricky to crack, but a nudge in the right direction will make the entire process fairly easy. So, if you are someone who is intimidated by the ESOPs allocation process, take the first step in your ESOPs journey with this cheat sheet. And if you are still confused or are looking for personalised guidance, connect with us and we will connect you to experts today, we will make sure that you get started with your ESOPs journey as smoothly as possible. 

FAQs:

1. What does ESOP stand for ?

ESOP stands for Employee Stock Ownership Plan which is a type of employee benefit plan that provides workers with an ownership interest in the company. Companies establish ESOPs to allocate shares of company stock to employees, typically as part of their retirement benefits. ESOPs aim to align the interests of employees with shareholders and can serve as a motivation and retention tool.

2. What are the types of ESOP?

1. Incentive Stock Options (ISOs): Tax-advantaged stock options for employees with preferential tax treatment.
2. Non-Qualified Stock Options (NSOs or NQSOs): Stock options that do not qualify for special tax treatment and can be granted to employees, directors, and contractors.
3. Restricted Stock Units (RSUs): Company shares granted to employees with restrictions on sale or transfer until they vest.
4. Employee Stock Purchase Plans (ESPPs): Plans that allow employees to purchase company stock at a discount through payroll deductions.
5. Stock Appreciation Rights (SARs): Rights that provide employees with the increase in the value of a set number of shares over a period.
6. Phantom Stock: A cash bonus plan that pays the employee the value of company shares or the increase in that value over time, without actually granting shares.

3. What are ESOP Shares?

ESOP shares are the company stock allocated to employees through the ESOP. These shares represent ownership in the company and can increase in value over time. Employees typically receive these shares as part of their compensation package and can sell them after they are fully vested and exercised.

4. What is an ESOP Pool?

An ESOP pool is a reserve of company shares set aside specifically for allocation to employees through an ESOP. This pool ensures that there are enough shares available to grant to employees over time. The size of the ESOP pool is usually a percentage of the company's total outstanding shares and is determined by the company’s board of directors.

5. What is the Vesting Period in ESOP?

The vesting period is the amount of time an employee must work at a company before they earn the right to exercise their ESOP shares. During the vesting period, employees gradually gain ownership of the shares granted to them. For example, if an employee is granted 1,000 shares with a four-year vesting period, they might vest 25% each year, gaining full ownership after four years.

6. What is the Exercise Price in ESOP?

The exercise price, also known as the strike price, is the price at which employees can purchase the ESOP shares granted to them. This price is typically set at the time the options are granted and is often lower than the market price of the shares, allowing employees to benefit from the potential increase in stock value.

7. What is ESOP Buyback?

An ESOP buyback occurs when the company repurchases ESOP shares from employees. This typically happens when employees leave the company or retire, providing them with liquidity for their shares. The buyback price is usually determined by a valuation of the company and can provide employees with a significant financial benefit.

8. How Does an ESOP Work?

How ESOPs Work:

1. Establishment: The company sets up an ESOP trust and allocates a pool of shares to it.
2. Allocation: Shares from the ESOP pool are allocated to individual employee accounts, often based on salary or tenure.
3. Vesting: Employees earn the right to the shares over a defined vesting period.
4. Exercise: Once vested, employees can exercise their options to purchase the shares at the exercise price.
5. Selling: Employees can sell their shares, typically after a certain period or upon leaving the company, often back to the company through a buyback program.

9. How to Calculate ESOP Value?

Calculating ESOP Value: To calculate the value of ESOP shares, follow these steps:

1. Determine the Number of Vested Shares: Find out how many shares are vested.
2. Exercise Price: Identify the exercise price of the shares.
3. Current Market Value: Obtain the current market value of the shares.
4. Calculation: Subtract the exercise price from the current market value for each share, then multiply by the number of vested shares.
   • Formula: (Current Market Value - Exercise Price) * Number of Vested Shares

Check out ESOP Calculator

10. How ESOP Works in India?

1. Regulations: Governed by the Securities and Exchange Board of India (SEBI) regulations.
2. Vesting and Exercise: Companies set specific vesting periods and exercise prices.
3. Taxation: Employees are taxed at the time of exercise and sale of shares. The difference between the exercise price and the market price at the time of exercise is taxed as a perquisite, and any gains from the sale of shares are subject to capital gains tax.
4. Buyback: Companies may offer buyback options, providing liquidity to employees for their vested shares.