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.
Advantages of ESOPs
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.
Process of Issue of ESOP
Preparation and approval of ESOP Scheme
Approval from shareholders
Dispatch of offer letters
Vesting of options
Exercise of options by the employees
Preparation and approval of ESOP Scheme
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.
Approval from shareholders
Take the shareholder’s approval for the issuance of shares through ESOP in the general meeting through special resolution
Dispatch of offer letters
Send options to the employees, directors and officers of the company for purchasing shares under ESOP.
Vesting of options
There shall be a minimum period of one year between the grant of options and vesting of option
Exercise of options by the employees
- 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’
General practices to choose and apply the name are:
Name should be distinct and unique.
Name should be short and simple.
Name should not contain any restricted words.
Name should not infringe any Trademark Registered and should not be identical to any company or LLP registered.
SC are required to file various eForms on MCA portal, digitally sign documents for the incorporation of the company and other applications.
Application for online registration of the company is required to be made online using SPICe INC-32 form along with e-MOA & e-AOA. DIN PAN, TAN etc. are to be filed along with SPICE INC-32.
On review and verification and after satisfaction, Registrar may issue the Certificate of Incorporation showing the Corporate Identification Number (CIN) and date of incorporation of the company along with the PAN and TAN of the company.
After depositing the initial capital in the bank account of the company, it is required to file form INC-20A for Commencement of Business post which a company can commence its business.
Information required for ESOP Scheme
- % Of ESOP pool
- Balance sheet and Profit & Loss Account
- Board’s Report
Who and Why should you get Private Limited Company Reistered?
Any person who would like to avail the following advantages may opt for this form of structure
- limited number of members,
- less compliances than public company,
- limited liability of members,
- less capital contribution and
- tax advantages
may opt for this form of structure.
How can Startup Movers assist you in ESOP implementation?
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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Frequently asked questions
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.
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.
The options granted to employees shall not be transferable to any other person.
The option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.
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.
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.
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.
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.
