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Startup Esops (Employee Stock Option Plan)

An ESOP (Employee stock ownership plan) refers to an employee benefit plan which offers employees an ownership interest in the organization. The ESOP is generally designed to benefit employees who remain with the employer the longest and contribute most to the employer’s success.

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Advantages of ESOPs

Increased productivity

The company gains employees’ goodwill, loyalty and commitment. Employees are motivated and encouraged to think like owners.

Attracts Top Talent

Helps attract fresh talent on a regular basis. Having an opportunity to have a share in a company can be an attractive bonus for top talent seeking new job opportunities, as it provides a secure retirement plan.

Finance Growth

Can be used to finance growth through its tax-privileged status in a cost-effective manner.

Improved Company Relations

ESOPs Improve the communication between employee and managers and increase cooperation. The Employer shares the same interests with the Employee, which is to work together for the overall growth of the company.

Tax Advantage

The tax benefits of an ESOP exit strategy can be significant. These benefits accrue to the selling shareholder(s) (the corporation), and to the employees who participate in the ESOP.

Timely Implementation

An external, third-party sale can be a lengthy process, with many moving parts. Owners looking to transition out of the company in short order, an ESOP can be an appealing option.

Who is eligible for ESOPs?

Only permanent employees of the company or its subsidiaries or its holding company are eligible for ESOP grants. Part-time employees, consultants, advisors, mentors are therefore NOT eligible for ESOPs

Directors on the board whether a whole-time director or not, of the company or, its subsidiary company or its holding company are also eligible to receive ESOPs

The founders/promoters of DPIIT recognized start-ups are eligible to receive ESOPs for up to 10 years from the date of incorporation.

How can Startup Movers assist you in ESOP implementation?

  • Preparation of ESOP scheme.
  • Assistance on valuation.
  • Preparation of notices, resolutions and minutes
  • Allotment assistance
  • 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.

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Process of ESOP

ESOP Scheme needs to be prepared by the company and approved by the Board of Directors. Price of the shares issued pursuant to ESOP is also determined beforehand.

Take the shareholder’s approval for the issuance of shares through ESOP in the general meeting through special resolution

Send options to the employees, directors and officers of the company for purchasing shares under ESOP.

There shall be a minimum period of one year between the grant of options and vesting of option

  • After approval of ESOP scheme by the shareholders, grant options to the eligible employees.
  • Allotment of Shares, as and when options are exercised
  • Maintain a ‘Register of Employee Stock Options’

Information required for ESOP Scheme

% Of ESOP pool
Balance sheet and Profit & Loss Account
Board’s Report
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Frequently asked questions

Everything you need to know about the product and billing.

The term Permanent Employee has not been explained in the enabling legal provisions of ESOP nor has it been defined under the Companies Act per se. Considering the practical aspects, in case of both Listed and Unlisted Companies, an employee who has satisfactorily completed the probation period can be considered to be a Permanent Employee.

In the event of the death of employee while in employment, all the options granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.

There is no minimum or maximum threshold on the quantum of ESOP or the number of employees participating in ESOP. Also, the employees issued shares under ESOP are not counted in the maximum limit of shareholder (200) in case of Private Company in terms of the definition of Private Company under the Companies Act.

In case the employee suffers a permanent incapacity while in employment, all the options granted to him as on the date of permanent incapacitation, shall vest in him on that day.

The options granted to employees shall not be transferable to any other person.

In the event of resignation or termination of employment, all options not vested in the employee as on that day shall expire. However, the employee can exercise the options granted to him which are vested within the period specified in this behalf, subject to the terms and conditions under the scheme granting such options as approved by the Board.

The option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.

Cliff period is the minimum time an employee needs to work in a company before any of the options can be vested. A minimum of 1 year cliff is required as per Indian laws and this is also the typical timeframe startups use for the cliff period.
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