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Startup Esops (Employee Stock Option Plan)
An ESOP (Employee stock ownership plan) refers to an employee benefit plan which offers employees an ownership interest in the organization. The ESOP is generally designed to benefit employees who remain with the employer the longest and contribute most to the employer’s success.
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Advantages of ESOPs
Increased productivity
The company gains employees’ goodwill, loyalty and commitment. Employees are motivated and encouraged to think like owners.
Attracts Top Talent
Helps attract fresh talent on a regular basis. Having an opportunity to have a share in a company can be an attractive bonus for top talent seeking new job opportunities, as it provides a secure retirement plan.
Finance Growth
Can be used to finance growth through its tax-privileged status in a cost-effective manner.
Improved Company Relations
ESOPs Improve the communication between employee and managers and increase cooperation. The Employer shares the same interests with the Employee, which is to work together for the overall growth of the company.
Tax Advantage
The tax benefits of an ESOP exit strategy can be significant. These benefits accrue to the selling shareholder(s) (the corporation), and to the employees who participate in the ESOP.
Timely Implementation
An external, third-party sale can be a lengthy process, with many moving parts. Owners looking to transition out of the company in short order, an ESOP can be an appealing option.
Who is eligible for ESOPs?
- Only permanent employees of the company or its subsidiaries or its holding company are eligible for ESOP grants. Part-time employees, consultants, advisors, mentors are therefore NOT eligible for ESOPs
- Directors on the board whether a whole-time director or not, of the company or, its subsidiary company or its holding company are also eligible to receive ESOPs
- The founders/promoters of DPIIT recognized start-ups are eligible to receive ESOPs for up to 10 years from the date of incorporation.
Process of ESOP
ESOP Scheme needs to be prepared by the company and approved by the Board of Directors. Price of the shares issued pursuant to ESOP is also determined beforehand.
Take the shareholder’s approval for the issuance of shares through ESOP in the general meeting through special resolution.
Send options to the employees, directors and officers of the company for purchasing shares under ESOP.
There shall be a minimum period of one year between the grant of options. and vesting of option
- After approval of ESOP scheme by the shareholders, grant options to the eligible employees.
- Allotment of Shares, as and when options are exercised
- Maintain a ‘Register of Employee Stock Options’
Information required for ESOP Scheme
% Of ESOP pool
Balance sheet and Profit & Loss Account
Board’s Report
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- Preparation of ESOP scheme.
- Assistance on valuation.
- Preparation of notices, resolutions and minutes
- Allotment assistance
- Advise on the ongoing compliances and filings with MCA to be done by the company as and when shares are allotted
- Any other service required to facilitate smooth execution of aforesaid.