Updated: Jul 15
Task #1 Employee Stock Option Plans (ESOPs)
It is official! The country is in a lockdown for 21 days. Many companies, especially, startups feel that this mandatory 21-day stay at home, may affect their and their team’s productivity. While, it is true that work may not go on as usual, maybe it is the time to do those things for which you never got the time before. As a startup founder or an entrepreneur, there are many things which you need to take care of. Internal administration and management of your company, is one of such things. Amidst the avalanche of busy schedules, day-long meetings and satisfying clients’ expectations, many startup founders are unable to concentrate that much on the internal working of their company. We are bringing to you a series of 7 posts, wherein we discuss, what are the 7 things a startup founder can do, during these 21 days of lockdown. The first issue, which we thought was pertinent to bring to you was what, you as a startup founder can do to streamline or initiate ESOPs in your company. ESOPs or equity stock options are a very effective way of retaining talent. However, much groundwork goes into managing ESOPs and creating a structure of rules and regulations around them. This could be an ideal time, when a startup founder can either initiate ESOPs in their company or manage and streamline their existing ESOP scheme.
How can I initiate ESOPs in my startup?
Having a good ESOP scheme in place is beneficial for the employers in order to retain talent as well as from a taxation perspective. Especially, in these times when an economic downturn is inevitable, ESOPs will play a great role in helping startups to prevent their ‘rockstar’ employees from switching employment. These are some of the things you can do, while in lockdown, to initiate ESOPs in your startup:
Structure your ESOP offering: Before you decide to grant ESOPs, you should figure out how much of the equity out of your total equity pool, are you willing to commit for the ESOP scheme. Remember, that granting equity stock options, may lead to dilution of your shareholding. This calls for a planned segregation of the equity which would be committed towards ESOPs. This can be done by creating a capitalization table, which contains a representation of the entire share capital ownership of your company. You may during these 21 days, either on your own or with the help of an outside organization (who can provide you remote services, such as LexStart), get a capitalization table created and determine what part of your equity would you want to commit for ESOPs.
Drafting the ESOP policy: ESOP policy of a company needs to be compliant with a plethora of laws and regulations. Hence, it is good, if you know the contents of your ESOP policy. You can get the policy drafted by your legal counsel or an external lawyer, remotely, and review the same in these 21 days. It is impossible for a founder to know all the policies which her company has, but, as you have been given the gift of time, utilize the same, to review at least the core policies which may cause compliance risks if not drafted properly.
Drafting the corporate resolution required: You can issue ESOPs by way of passing certain corporate resolutions. However, these corporate resolutions would need to be drafted beforehand. These 21 days would give you adequate time to liaise with your in-house counsel and get these resolutions drafted. You may review the same before you pass them at your next board meeting.
What can I do to manage my ESOPs during the lockdown?
Review of ESOP scheme/policy: ESOP policies or schemes require routine monitoring in order to ensure compliance. The capitalization table also needs to be updated routinely to capture the dilution in equity. Other things such as intimation of vesting of options to employees, keeping a track of which employees’ stock options got vested, which employee exercised his/her option, cessation of employment etc. are some of the issues which need to be continuously supervised, in order to ensure that the ESOP scheme is running smoothly. As a startup founder, you may not get time on ordinary days to audit your ESOP scheme and policies, but in the next few days, you can review your ESOP scheme and ensure that it is compliant and all the processes are current and updated. This will give you an idea of your equity dilution and future capacity of issuing ESOPs as well.
Do not think of this period of 21 days as a lull period. This is the time, when you can get most of your work done. So gear up and get working!
Watch out this space, for our next thing to do in these 21 days!