The Companies (Share Capital & Debenture) Rules, 2014
The said rules provide for relaxation for Start-ups, as they have been expressly permitted to issue ESOPs to their promoters and to directors who held more than 10% of the Start-up's equity shares for the first 5 years from the date of their incorporation whereas other companies are not permitted to do so.
A start-up cannot just grant options by issuing a simple letter to its employees. It has to follow the proper procedure under the law. It has to draft ESOPs scheme and get it approved at a shareholders meeting. After it has to issue a letter of the grant to the employee informing him how many options are being granted to him and vesting period. And if an employee wishes to exercise any of his vested options, he should make an Exercise Application to his employer company pursuant to which his options would be converted into equity.
What are terms or actions associated with ESOPs?
Granting of ESOPs, Vesting, Exercising and selling are the actions associated with Employee Stock Options (ESOPs).
- Grant is a process by which an employee is given an option. It is the delivering of the options to the employee. The grant shall specify the number of options given, the time of vesting, etc
- Vesting is a process whereby the employee acquires the right to exercise the options
- Exercising : The activity of converting the options granted to employee into shares by paying the required exercise price is known as the exercise of options. It is like buying shares.
- Selling : It is selling shares like normal shares.
In most companies in India, options vest for a period of 3-4 years from the date of grant of options and can be exercised anytime within a period of 2-5 years from the date of each vesting. ESOPs are structured in a way that they are exercised over three-five years. This is to ensure that the employees remain with the company for a longer period.
Alternatives to ESOPs are Restricted Stock Units (RSU), Employee Stock Purchase Plan (ESPP), Stock Appreciation Rights Plan (SAR).
Restricted Stock Units (RSUs)
Recently, there has been a growing trend of rewarding employees with Restricted Stock Units/ shares (RSUs). Restricted Stock Units represent an unsecured promise,i.e no strings attached, by the employer to grant an employee a set number of shares (at zero strike price) on completion of the vesting schedule or other conditions.
We can conclude that ESOPs are a great incentive for employees to put their heart and soul into an organisation. However, grant of options in itself does not mean that the employee will walk out of that organisation with millions in his bank account and employees should be conscious of this fact. Failure to understand the intricacies is likely to leave you highly disappointed when you resign to move on to your next job.
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