04 March 2022
2. Why is it called ESOPs and does it differ from the stocks that a founder holds?
|Founder's equity, sometimes known as founder's stock, is a type of shares awarded to a company's founders or early members. In actuality, founder's stock is just common stock that has been distributed to the company's founders.||ESOPs are given to directors and workers as an incentive and as a retention plan. They do not constitute an obligation, and they are offered to workers in the form of a right to exercise their option to acquire shares.|
3. At what stage of a company's growth are the ESOPs most valuable for an employee?
From the above it is clear that no matter the stage ESOP are valuable for the employee. However while signing up for ESOPs the employee should ask the following questions:
If your company's financial performance falls short of expectations, not only your pay but also your fortune will be jeopardised. As a result, only use your ESOP right to purchase shares if your company's fundamentals are sound. The issue of taxation must also be examined. You must pay tax on the difference between the fair market value and the exercise price when you execute the option.
5. What are the things to look out for when offered ESOPs? What are cliffs & vesting periods?
i. Is the exercise price fixed or based on the FMV (Fair Market Value)?
The exercise price of options can be whatever the corporation chooses when issuing the ESOP grant letter. Some firms use a minimal exercise price (for example, INR 10) while others choose an exercise price depending on the company's latest round value. The greater the difference between FMV and exercise price at the time of ESOP sale, the more money you create.
ii. Is there a vesting schedule? Is it a one-size-fits-all approach, a back-loaded approach,or performance-based approach?
When you participate in an Employee Shares Option Plan, you have the 'option' to acquire the company's stock at the time of exercise. The procedure by which you obtain the right to acquire these stocks on a systematic basis or according to a pre-determined calendar is known as ESOP vesting. Think of the vesting schedule as a timetable by which you obtain the right to ESOPs. The most typical vesting plan is uniform yearly vesting over four years, which means that after the first year of mandatory 'cliff' vesting, you will get 25% of the total ESOPs guaranteed to you every year for the next four years.
iii. When you leave the company, what happens to your ESOPs?
Your unvested ESOPs are returned to the ESOP pool when you depart or your employment term ends, but you should be aware of how your vested options are treated. Here you must consider how much time you will have to consider your alternatives after resigning. Consider that if you just have a few weeks to exercise, you'll have to pay a few thousands or perhaps crores of rupees to obtain possession of your shares. Most well-known companies let workers months or even years to exercise their vested options.
iv. When you exercise your options, what are the transfer restrictions?
There may be a clause in the ESOP programme that allows the firm or the founder to forcefully purchase back (call option) such shares at market price. A 'Right of First Refusal' or ROFR clause, for example, permits the business to review any sale or transfer offer you have received first, and only if the company agrees to waive the ROFR clause can you proceed with the sale or transfer of shares.
v. How does the corporation make ESOP liquidity available to employees?
Check the ESOP policy and grant letter to see how ESOP liquidity has been or will be made available to startup workers. Is this even brought up by the management? Remember that you will only profit from your ESOPs if a liquidity event occurs, such as a secondary transaction, repurchase, or ultimate IPO.
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