Overview
We aim to help companies use ESOPs as a tool to attract, retain, and incentivise their top talent. Our services include consultation on ESOP policies, drafting of ESOP schemes, and providing ongoing assistance to ensure that ESOPs align with your company's objectives and regulatory norms. With Vakilsearch, your business can leverage ESOPs to foster a culture of ownership and boost employee engagement.
What Is an ESOP or the Employee Stock Option Plan?
An Employee Stock Option Plan (ESOP) is a benefit plan that offers employees the right to buy company shares at a predetermined price. It's a tool companies use to attract, retain, and reward employees. ESOPs help to align employees' interests with the company's growth and success.
Benefits of Employee Stock Option Plan
ESOPs motivate staff as their benefits grow with the company's market share price
They help keep employees in the company, reducing turnover
Employees get rewarded for their hard work during challenging times
ESOPs prevent major cash outflows from the company.
Advantages and Disadvantages of an Employee Stock Option Plan
Advantages of ESOP
Motivation and Retention: ESOPs boost employee motivation and help in retaining talent as they create a sense of ownership among employees.
Tax Benefits: ESOPs come with specific tax advantages for both employers and employees.
Cash Flow: They help companies preserve cash, as they are a form of non-cash compensation.
Disadvantages of ESOP
Dilution of Ownership: ESOPs can lead to dilution of ownership and control as employees become shareholders.
Fluctuating Market Risk: The benefit of ESOPs is tied to the company's stock price, which can be volatile.
Administrative Costs: ESOPs involve certain administrative costs and complexities in their implementation and management.
How Does an Employee Stock Option Plan Work?
Let us see on how an ESOP work from the explanation given below:
When a company offers ESOPs, they are held in trust for a specific amount of time. The vesting term is the time frame in question. Employees may then exercise their ESOPs after the vesting time has passed. The quantity of shares to employees that may be offered, their price, and the recipients are all determined. Following this, the chosen employees will have the opportunity to exercise their ESOPs and purchase company shares at allowed prices, which are below market value.
Cost of ESOPs and Distributions
The cost of ESOPs can vary depending on the specific plan. However, there are some common costs that employers may incur, such as:
The cost of setting up and administering the plan
The cost of buying shares for employees
The cost of providing loans to employees to purchase shares
The cost of taxes
Checklist for Employee Stock Option Plan 2023-2024
Check the articles for any specific provision on the issue of share under employee stock option scheme
The date and members of the compensation committee should be included in the board meeting
Notice of general meeting including the number of ESOP to be granted
Likewise, hold a general meeting for approval of shareholders by way of ordinary resolution. Additionally, include the authorisation for the issue of ESOP shares and the formation of the compensation committee
There must be a compensation committee (CC). The CC shall be a committee of board directors consisting of a majority of independent directors
Approval of shareholders by separate resolution
The requirement of a draft copy of certificates
Filing of Form-PAS-3
Disclosure in Director Report (DR)
Maintenance of the register of ESOP in SH-6 at the registered office of the company or such other place as the board may decide
Entities in the register shall be authenticated by CS or any other person authorised by the board.
Eligibility for Employee Stock Option Plan
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.