Helping employees invest in a startup company shares is an excellent way to keep the employees motivated to work better. A startup company requires funds, and employees want lucrative deals. It becomes a win-win situation for both.
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- 2 minute read
Businesses use ESOPs to encourage employees to own a part of the company by buying shares and aligning their hard work and performance. ESOPs are used in India as well as worldwide. ESOPs for startups can be a great means to gather capital and improve employee retention. Let’s learn more.
What are ESOPs for startups?
The word ESOP means Employee Stock Ownership Plan. A company offers part ownership in the form of shares to its employees. Another meaning is Employee Stock Options. You must note that these options aren’t shares of the company. It means that an employee has the opportunity to purchase a company’s shares at a predetermined price sometime in the future. Employees receive ESOPs through a grant letter containing the exercise price, vesting details, grant date, etc. The employees are not under any obligation but have the right to buy shares in the company.
Startups actively deploy ESOPs to achieve various objectives. These are:
- A startup company requires funds, and if they offer stocks to the employees, they get funds and enhanced employee performance.
- ESOPs are an excellent way to retain, encourage, and appeal to employees.
- Employees work better for the startup company’s growth as they become part owners.
Legal documents required to create ESOPs for startups
The following documents are required to create ESOPs for startups:
How to create ESOPs for startups
- You have to prepare an ESOP policy or scheme through a professional first.
- It would cover various clauses such as vesting, pool size, exercise period, ESOP administration, etc.
- You would need the board to approve the ESOP scheme. You need approval for the ESOP scheme through an EGM by a special resolution. You must know it should be a special resolution, not an ordinary one.
- You need to file the special and EGM resolution with the ROC. You are now ready to grant ESOPs to your employees.
FAQs
What is an ESOP?
An ESOP (employee stock ownership plan) helps employees invest in a startup company by buying part ownership through shares.
What is an ESOP’s purpose?
The purpose of ESOPs for startups is two-fold. First, a startup company requires funds, and offering ESOPs to employees can help them get those funds. The second is that it keeps employees motivated to perform better, work hard, and stay with the startup company.
Can ESOPs be offered to any employee?
A startup company can only offer ESOPs to a permanent employee. While there is no legal definition of a permanent employee, looking practically, a permanent employee has finished their probation period.
What are the documents required for ESOPs?
The following documents are required to create ESOPs for startups:
Employment agreement
ESOP plan
Trust deed
Letter of a grant of options
Letter of acceptance by employees
Can ESOP include future employees?
Yes! ESOP can include future employees as well. Both existing and prospective employees can join in on the scheme. Future employees can join after the scheme’s approval.
