How to Start a Employee Stock Option Plan

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What is Employee Stock Option Plan (ESOP)?

Employee Stock Option Plan (ESOP) simply means a plan where the company grants options to their employees.

While giving ESOP's option, the selling shareholder and participants obtain numerous tax benefits. It not only keeps worthy employees inspired which helps to grow your company, rather than just accomplish their obligations, it guarantees that you don't lose them for a number of years.

Applicability

It shall apply to any company whose shares are listed on any stock exchange in India.

Advantages of ESOP

  • 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.

Highlights of ESOP

  • Eligibility

    An employee who is a promoter or a part of the promoter group will not be entitled to participate in the Employee Stock Option Plan of the company. A director who holds in excess of 10% of the outstanding equity shares of the company either by himself or through his family or through any investment company, directly or indirectly will not be qualified to take part in the Employee Stock Option Plan

  • Shareholder Approval

    The ESOP shall be approved by the shareholders by a special resolution.

Other criteria will come into picture like

  • Pricing
  • Lock-in period, vesting and exercise of options.
  • No transferability of stock options.
  • Certificate from Auditors to be obtained for the same.
  • Preferential Allotment.

Process for ESOP

Process for Employee Stock Option Plan:

  • Grant Notice
  • Option plan
  • Allotment and documentation
  • Options agreement
  • Business valuation

Time to complete ESOP

Time to complete For Employee Stock Option Plan:

  • 30 WORKING DAYS
  • Once information is received, the ESOP will be ready to complete in around 4 to 5 weeks.

Frequently Asked Questions


Yes, the employee stock option plan includes both the existing and future employees.

Yes, a Step down subsidiary company is considered as a subsidiary to the extent permitted by law. Also, an Indian Company can grant Employee Stock Option Plans to the employees of its Subsidiary Company, whether located in India or outside India.

No, a company is not allowed to set the exercise price below the face value of its shares.

Yes, a listed company can set the exercise price of the ESOPs below the current market price.

Yes, a company has the right to issue ESOPs at a different exercise price for each employee or class of employee.

Yes, a company can issue any type of shares as ESOPs. The term “any type” includes Equity Shares, Shares with Differential Voting Rights, and Preference Shares.

No, a share given in the Employee Stock Option Plan must carry a voting right, which needs to be same as the voting right given to the existing or differential shareholders.

The steps included in the process to issue ESOPs are Grant Notice, Option Plan, Allotment and Documentation, Options Agreement, and Business Valuation.

Normally, a period of 30 business working days is required to complete the process of Employee Stock Option Plan.

The benefits of ESOP are Attract Top Talent, Build Motivation, and Longer Vesting Period.

The term “Employee Stock Option Plan” simply means a plan where the company grants options or shares to its employees.

Only a company whose shares has been listed in the recognised stock exchange can undergo the process of ESOP.

No. ESOPs or Employee Stock Option Plans are valid only till the expiry of the exercise period.

No, ESOPs are not eligible to be converted into shares after the expiry of the exercise period.

Yes, a holding company has a right to issue ESOPs to the employees of its subsidiary company. However, the same is possible only if the same has been provided in the provisions of AOA (Articles of Association).

SEBI, Companies Act 2013, and Income Tax Act, governs the provisions and process of ESOPs in India.

No, mere grant of ESOP does not make an individual a shareholder of the issuing company.

Yes, the option of ESOP is legal in India.

Yes, a company can change or modify its regulations with regard to ESOP after its grant and acceptance by employees.

No, a promoter is not allowed to participate in the process of ESOP.

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