Thin inking king to Hire Ta Tale lented ed Empl ployees ees? - - PowerPoint PPT Presentation

ESOPs: Wort hy Device for St art ups

Thin inking king to Hire Ta Tale lented ed Empl ployees ees?

Hire & Retain best of the human resources without paying huge chunks of salary;

Why St art ups Require ESOP ?

Real value of a st art up is not cash but ESOPs

Builds employee-company relationship for mutual long-term benefit; A type

• f

non-cash investment

• f

an Employer to gain human assets. Keep the employees motivated and focused in company’s growth. In small company, an employee puts in the same amount of effort and grows faster. As the company grows, its stock value grows. Startup (less employees), the success return gets distributed among less number

• f

people, i.e. an employee earns more in less time. Return on ESOPs are considerably higher than a person’s annual salary.

Know More About ESOPs

Stock Option Plans / Equity Incentive Plans (commonly referred to as ESOPs) are one of the most important tools to attract, encourage and retain Employees.

What are St ock Opt ions?

Company grants an

• ption

to its Employee to acquire Shares at a future Date and at predetermined price. Extending benefits through Stocks is like creating a win-win situation for both Employer & Employee.

Types of St ock Opt ions

Stock Options (Sharing in the Capital of the Company) Employee Stock Purchase Scheme (ESPS) Employee Stock Option Plan (ESOP) Restricted Stock Units / Awards (RSUs / RSAs) Stocks Indexed Plans (No sharing in the Capital

• f the Company)

Stock Appreciation Rights (SARs) Phantom Stocks Sweat Equity Shares

Employee St ock Opt ion Plan

Employee St ock Opt ion Schemes are t he most commonly used forms of St ock Opt ion Plans. The opt ion grant ed under t he plan confers a right , but not an obligat ion on t he employee t o t ake shares of t he Company at a predet ermined price over a fixed period.

Example

Grant of

• ptions

Vesting

• f
• ptions

Exercise

• f Vested
• ptions

Allotment

• f Shares

Employee St ock Purchase Scheme

Employee Stock Purchase Plans allow Employee to purchase Company’s shares, often at a discount from Fair Market Value. The terms of the Plan determines the tenure and price for possession of the Company’s shares by the Employees. Usually, ESPPs are being framed for offering shares as a part of public issues.

Example

Offer of shares at discounted price Allotment of shares

If accepted by the Employee

Rest rict ed St ock Unit s

Under this kind of incentive plan, the Employee is awarded with the shares subject to fulfillment of certain underlying conditions. If the said underlying conditions are not fulfilled, then the awarded shares stand withdrawn.

Example

Grant of

• ptions

Vesting of

• ptions

Exercise of Vested

• ptions

Allotmen t of shares

Underlying Conditions like: Target / Revenue Achievement, Performance based etc..

If Condition fulfilled

Sweat Equit y Shares

Sweat Equit y Shares mean such equit y shares as are issued by company t o it s direct ors or employees at a discount or for considerat ion, ot her t han cash, for providing t heir Know-how or making available right s in t he nat ure of int ellect ual propert y right s or value addit ion, by what ever name called.

Example

Value a person’s sweat Shareholder’s Approval Allotment

• f Shares

Lock-in of 3 years

Check-point s for Sweat Equit y

 The issue must have been authorised by a special resolution passed by the Company.  The Special resolution authorising the issue shall be valid for making the allotment within a period of not more than 12 months from the date of passing resolution.  The shares issued to directors or employees shall be lock-in for a period of 3 years from date of allotment. 

The shares t o be issued shall be valued at a price det ermined by a regist ered valuer as t he fair price giving just ificat ion for such valuat ion.

 At least one year must have elapsed since the date

• n

which the Company had commenced business.

St ock Appreciat ion Right s

SARs provide employees with cash payments equal to the appreciation of the company’s stock over a specified duration which is generally between the date of grant and final exercise of options. SARs can be settled either by allotting Equity Shares, equivalent to the amount of appreciation or by simply paying the value of appreciation in cash.

Example

Grant of Options Exercise of Vested Options Vesting of Options

Share price on Grant Rs 10 Share price on Exercise Rs 100

Shares Cash Appreciation = Rs. 90/-

Phant om St ocks

Phantom Stock is a form of long-term deferred compensation using the Company shares as the measuring device for calculating the value of the deferred compensation. The Employee is rewarded in the form of cash corresponding to the value of the Company’s Share on the date of maturity / exercise.

Example

Grant

Vesting

Exercise

Share Price on Exercise= Rs. 100 Shares Allotted

Rout es for ESOP

Direct Rout e

Trust Rout e

Regulat ory Regime

Companies Act, 2013 Accounting Implications Stamp Laws Income Tax Act, 1961

Check-point s for ESOP

(Rule 1 2 of Companies (Share Capit al & Debent ure) Rules, 2 0 1 4 )

 Approval of Shareholders.  All Directors excluding Promoter Director and Independent directors.  Minimum period of one year between grant and vesting

• f options.

 Freedom to determine Exercise Price.  Permanent Employees

• f

Company, Holding Company and Subsidiary Company are covered.  Annual prescribed disclosure in Directors Report.  In case

• f

death & permanent disability,

• ptions

granted shall vest in the legal heirs.  Options granted cannot be pledged, hypothecated or

• therwise transferred.

Work Flow of Esop

Employee accepts the Offer Employee Exercises the Vested Option Vesting Period Minimum gap of 1 year between grant and vesting of options Employee gets the shares Allotted and becomes the Shareholder

• f

the Company Employee can sell the Shares allotted and can get benefit of increase in the current market price

• f

shares. Grant

• f
• ptions

to Employees

Decisive Crit eria

What to give? When to give? How much to give? Route? How to manage? Pricing? Accounting? Taxability? Exit Mechanism? Compliances? Documentation?

Few Import ant Aspect s

Who shall be awarded? Quantum of Equity to be shared? Industry Pay Standard = 100 Startup

Can’t afford to pay equivalent to 70% cash salary 30% ESOP

Ideal Sharing = 20% of Capital

Persons for Management Persons for Business Development Persons for Administration & Execution

Few Import ant Aspect s

Vesting Schedule Startup Graded One-time

Options vest in tranches, generally

• ver a period of 4 years

form the date of Grant 100%

• f

Options Granted get vested at

• nce.

Serves long-term employee association / retention motive

Few Import ant Aspect s

Exit Opportunity Event Linked Not Linked

 Funding  Upon management’s discretion  Listing of Company  Merger / Acquisition  Liquidation

• f

Company  Can be bought back by promoters / investors / existing employees / any outside party

For ESOPs, there are basically 2 types of Valuations: Accounting Valuation: This Valuation is required to amortize the Employee Compensation Cost during the vesting period. Accordingly, the compensation value is computed initially i.e. at the time of Grant and at the end of each reporting period till the liability in respect of Options granted gets settled. Perquisite Valuation: This Valuation would be conducted at the time of Exercise of Options by the Employee to know the value of the perquisite to be added in the Employee’s salary for the month in which he makes the exercise of his option.

Valuat ion Aspect s

• Employee

Compensation Expense (equivalent to Price Discount)= Market Value- Price at which Shares are offered

Allowable Expense during the relevant Accounting Period in which the Shares are issued. Suppose : Current Value Rs.55/- Offer price is Rs.10/- Then Price Discount/ Employee Compensation Expense to be booked is Rs.44/-. REGULATORY FRAMEWORK

ICAI Guidance Note

Direct Impact on Profit & Loss Account

Account ing Aspect s

Taxat ion Aspect s

TAX TREATMENT In the hands of Employee At the time of Allotment: Taxable Value= FMV on the date of exercise of

• ptions-Exercise Price

At the time of transfer

• f shares;

Taxable Value= Sales Price of Shares-FMV of shares at the time of Exercise In the hands of Employer Compensation cost

Parameters Employee Stock Options Plan(ESOP) Employee Stock Purchase Plan(ESPP) Stock Appreciation Rights(SAR) Restricted Stock Unit(RSU) Which helps best meet below objectives Alignment High High Medium High Reward High Medium Medium Medium Retention High Medium Medium High Employee Preference High High Medium High

Comparat ive Analysis

FOR COMPANY FOR EMPLOYEES

• Align

employees’ interest with those

• f

shareholders;

• Recruit or retain key employees;
• Motivate Employees to become more productive;
• Increase loyalty, job satisfaction & reduce staff

turnover;

• Savings of Opportunity Cost

in replacing an Employee;

• Non-cash Compensation strategy;
• Tax exemptions;
• Financial

Rewards, linked to individual and

• rganizational performance or a long term savings

and ownership structure;

• Improved

awareness about the ‘big picture’ decisions; directions and corporate plans of the enterprise;

• An increased sense of ‘ownership’ and association

with the enterprise;

• Return on ESOPs can even be higher than a

person’s annual salary;

Advant ages of ESOPs

FOR COMPANY FOR EMPLOYEES

• Compensation Cost in respect of ESOPs will affect

the books of accounts;

• Once

the

• ptions

are granted, it becomes a contractual liability of the company to allot shares to the employees when they exercise the

• ptions

(except in case of breach & misconduct)

• If

the company value does not increase, the company stock is less attractive and employees may wish to invest their funds somewhere else, and they might not exercise the options granted to them;

• It’s a gamble;
• The share price can decrease and this can

impact the value

• f

the holding for an employee;

• The employee has all their eggs in one basket.

Essentially the employee is over exposed to the company’s shares, so if the company does not perform or worse goes into administration the employees investment is lost (this problem can be minimized by limiting the amount of salary or shares that the employee can buy);

Dis-Advant ages of ESOPs

About Us

is a vent ure promot ed by Corporat e Professionals Group, which is best illust rat ed for providing widest spect rum of corporat e services at one st op. We are recognized as a dest inat ion where all pat hs in hunt for corporat e solut ions end. Through our st rong foundat ions and robust growt h, we have emerged as leading corporat e advisors at t aining an edge in providing services at int ernat ionally compet it ive st andards. Our diversified t eam of professionals who have at t ained expert ise in delivering supreme corporat e services ut t erly just ifies

• ur name, Corporat e Professionals.

Our Offerings

Planning / Designing / Document at ion Opinion / Advisory St at ut ory Compliances ESOP Trust Format ion ESOP Account ing & Valuat ion Administ rat ion Implement at ion / Employee Communicat ion

We at Corporat e Professionals, provides a comprehensive solut ion for all ESOP relat ed needs of any Company. Our Web Applicat ion, is

Our Value Added Services

specifically designed by keeping in view t he regulat ory framework under which ESOPs Funct ion

Cont act us

For furt her clarificat ion, please visit www.esoponline.in Corporat e Professionals, D-2 8 , Sout h Ex-Part -1 , New Delhi - 1 1 0 0 4 9 , India, (B): +9 1 1 1 4 0 6 2 2 2 3 1 | (D): +9 1 1 1 4 0 6 2 2 2 0 0 | (F): +9 1 1 1 4 0 6 2 2 2 0 1 | (e) info@esoponline.in

Speaker : Ms. Mohini Varshneya AVP & Head- ESOP Services M: +91 9971673332 E: mohini@indiacp.com