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:
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:
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.
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