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

Thin inking king to Hire Ta Tale lented ed Empl ployees ees? ESOPs: Wort hy Device for St art ups

Why St art ups Require ESOP ? Hire & Retain best of the human resources without paying huge chunks of salary; Builds employee-company relationship for mutual long-term benefit; A type of non-cash investment of an Employer to gain human assets. Real value of a st art up is not cash Keep the employees motivated and but ESOPs 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 of 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

What are St ock Opt ions? Stock Option Plans / Equity Incentive Plans (commonly referred to as ESOPs) are one of the most important tools to attract, encourage and retain Employees. Company grants an option 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 Employee Stock Purchase Scheme (ESPS) Employee Stock Option Plan (ESOP) Stock Options Restricted Stock Units / (Sharing in the Capital of Awards the Company) (RSUs / RSAs) Sweat Equity Shares Stock Appreciation Rights (SARs) Stocks Indexed Plans (No sharing in the Capital of the Company) Phantom Stocks

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 Vesting Exercise Grant of Allotment of of Vested options of Shares options options

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 If accepted by the Employee Allotment of at discounted shares price

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 Allotmen Exercise of Grant of Vesting of t of Vested options options shares options Underlying Conditions like: If Condition fulfilled Target / Revenue Achievement, Performance based etc..

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 Shareholder’s Allotment person’s Approval of Shares sweat 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.  At least one year must have elapsed since the date on which the Company had commenced business.  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 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. The shares issued to directors or employees shall be lock-in for a period of 3 years  from date of allotment.

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 Exercise of Grant of Vesting of Options Vested Options Options Share price on Share price on Grant Rs 10 Exercise Rs 100 Shares Appreciation = Rs. 90/- Cash

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 Exercise Vesting Share Price on Exercise= Rs. 100 Shares Allotted

Rout es for ESOP

Direct Rout e

Trust Rout e

Regulat ory Regime Companies Act, 2013 Income Tax Act, 1961 Stamp Laws Accounting Implications

Check-point s for ESOP (Rule 1 2 of Companies (Share Capit al & Debent ure) Rules, 2 0 1 4 )  Approval of Shareholders.  Permanent Employees of Company, Holding Company and Subsidiary Company are covered.  All Directors excluding Promoter Director and Independent directors.  Freedom to determine Exercise Price .  Minimum period of one year between grant and vesting of options.  Annual prescribed disclosure in Directors Report .  In case of death & permanent disability, options granted shall vest in the legal heirs.  Options granted cannot be pledged, hypothecated or otherwise transferred.

Work Flow of Esop Minimum gap of 1 year between grant and vesting of options Employee Vesting Period Grant of Exercises the Employee options to Vested Option accepts the Offer Employees Employee can sell the Employee gets the Shares allotted and can get shares Allotted and benefit of increase in the becomes the current market price of Shareholder of the shares. Company

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

Few Import ant Aspect s Who shall be awarded? Persons for Persons for Persons for Business Administration Management Development & Execution Quantum of Equity to be shared? Industry Pay Can’t afford to pay equivalent to Standard = 100 Startup Ideal Sharing = 20% of 30% 70% Capital ESOP cash salary

Few Import ant Aspect s Vesting Schedule Graded One-time Options vest in 100% of Options tranches, generally Granted get vested at over a period of 4 years once. form the date of Grant Startup Serves long-term employee association / retention motive

Few Import ant Aspect s Exit Opportunity Event Not Linked Linked  Upon management’s discretion  Funding  Can be bought back by  Listing of Company promoters / investors / existing  Merger / Acquisition employees / any outside party  Liquidation of Company

Valuat ion Aspect s 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.

Account ing Aspect s REGULATORY FRAMEWORK ICAI Guidance Note • 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 : Direct Impact on Profit & Loss Current Value Rs.55/- Account Offer price is Rs.10/- Then Price Discount/ Employee Compensation Expense to be booked is Rs.44/-.

Taxat ion Aspect s TAX TREATMENT In the hands of In the hands of Employer Employee At the time of transfer At the time of of shares; Allotment: Taxable Value= Sales Compensation cost Taxable Value= FMV on Price of Shares-FMV of the date of exercise of shares at the time of options-Exercise Price Exercise

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