How do Employee Stock Options work, and how do they help companies retain staff? Futurebooks gives the lowdown on ESOPs in Singapore
Most business owners would agree that their greatest asset is the team. It’s getting common to show employees appreciation not only via bonuses, but also through Employee Stock Options (ESOP) scheme. ESOPs also act as a strong retention mechanism.
Here are few pointers for Singapore business owners on ESOPs.
1. How do Employee Stock Options work?
When a company decides to reward its well deserving employees for their effort in growing the business, the management may choose to give an ‘option’ (a form of invitation) to its employees to become shareholders in the company. These options also act as a form of alternate ‘currency’ to reward and retain the core team.
Such options, and the employees right to exercise them are governed by an ESOP Agreement.
2. What is an ESOP Agreement?
An ESOP Agreement authorises the allocation of a certain percentage of equity shareholding to form an Employee Stock Option Pool. It is out of this pool of stock (shares), that employees will be given an option to participate in the shareholding of the company.
To simplify, let’s look at this example:
Company ABC currently has 10,000 shares fully paid by five shareholders. The company has decided that an ESOP pool of 2,500 additional shares be created.
In this case, when the management of the company decides to give an option to any of its employees to buy the shares, it will only be possible from the pool of 2,500 shares.
An ESOP Agreement will also include details of directors and officers of the company who will constitute an ESOP committee. This committee is responsible for handling the ESOP pool and gives its recommendations to the board of directors.
Keep in mind a few important aspects when preparing the agreement:
- Eligibility criteria for the employees,
- When the ESOP may be granted,
- What is the lock in period,
- Constituting the ESOP committee and outlining the brief functions of the ESOP committee,
- Issuance of the ESOP shares and
- Closing the ESOP pool.
3. Is there any lock in period for employees, before they can exercise their right to buy and sell the shares?
Yes, usually there is a lock in period for the employees before they are eligible for the ESOP shares. Once the employees are granted the company’s shares, there may be lock in period again before they sell the company’s shares as well.
4. From a company’s (employer’s) perspective, what are the compliance requirements that need to be in place for an ESOP scheme?
As an employer, you will need the following:
- Decide the percentage and number of shares in the ESOP pool.
- You may want to inform future investors about the ESOP pool in place, so the capitalisation table may be calculated accordingly. (Cap table is a form of showing a startup’s shareholding structure in a table format on a fully diluted basis.)
- Once you have the ESOP pool in place, have an ESOP Agreement executed.
- Once the ESOP Agreement is drafted, pass a directors resolution to authorise its directors to sign the ESOP Agreement.
- Once the ESOP agreement is signed and adopted, constitute the ESOP committee.
- The ESOP Committee will then record the proceedings of the ESOP meeting and keep the directors informed of any grant, issuance etc made to its employees.
- If the ESOP has been issued to any employees, necessary returns be filed with ACRA informing them about the addition of the shareholders. We’d like to highlight this; the return to ACRA is only when the ESOPs are issued and not at the time of formation or grant. This makes administering ESOPs so much easier for startups.
- Update the ‘Register of Members’ with the details of the new shareholders.
So go ahead put an ESOP in place even if you are an early-stage startup, it’s not as complicated as it seems!
Futurebooks assists startups and small businesses in administering and managing ESOPs.
The views expressed are of the author, and e27 may not necessarily subscribe to them.
e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested to share your point of view, please send us an email to writers[at]e27[dot]co.