Employee Stock Option Plans (ESOPs) & Is IT Beneficial For Startups?

Startups

Employee Stock Option Plans (ESOPs) & Is IT Beneficial For Startups?

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According to recent reports on the Indian startup ecosystem, startups are said to be mushrooming at an annual growth rate of 10-12%.

The emergence of Startups has also heralded the new age of employee compensation structures. The fierce competition in the startup fraternity makes onboarding employees and retaining them very important.

And this is only possible by rewarding them for their contributions. One such reward that startups give out these days is Employee Stock Options (ESOP).

ESOP can be formulated by companies. Most Startups are Private Limited Companies and are governed by the Companies Act 2013.

The Act permits the allotment of shares to employees of the Startup (or its holding or subsidiary company), under an approved ESOP, at a future date but, at a pre-determined value.

Making ESOP a part of the offerings to employees is the best way to get the team working better and longer. There is a subtle sense of pride that employees may feel when you make them a part of business success. Also, it is a great way to retain worthy personnel by offering them a higher stake.

Finally, in addition to drafting an ESOP that is compliant with the law and is tax-efficient, the Startup should also –

  • Create a viable & easy to govern stock options structure, which could include establishing an Employee Stock Option Trust, funded by the Startup.
  • Ensure compliance with Foreign Exchange Management Laws when the ESOP is of the foreign parent company but can be accessed by Indian employees.
  • Educate the employee on the stock option plan & guide them, where necessary.
    Remember, that ESOPs are benefits extended to employees and their interest is paramount.

 

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