I was talking to a startup founder about ESOPs and he very proudly informed me that he has given ESOPs to his employees. I must say I was impressed! The reason being, this friend of mine had incorporated his start-up only 6 months back and although he had been hiring aggressively, I didn’t think he had the bandwidth to set up a ESOP Policy to give the employees the ESOP benefits. On further probing, he very innocently explained to me that he had indicated the no. of ESOPs for each employee and other details of the ESOP grant in their respective offer letters. Therefore in his opinion, he had completed the daunting task of “granting” ESOPs.
Well, he is not the only one! Most entrepreneurs think they have granted ESOPs just because they have mentioned the same in the offer letter or employment agreement of their employees, without realizing that under the Indian laws (more specifically, the Companies Act, 2013), for a company to grant ESOPs to its employees, the company has to first create a ESOP Policy, which has to be approved by the Board of Directors and Shareholders of such company.
EMPLOYEE STOCK OPTIONS – LIFECYCLE
ESOP POLICY – HOW IT WORKS
The law has a very specific ESOP definition and prescribes all the terms that need to be included in a ESOP Policy. You should therefore ensure that you include the following terms in a ESOP Policy:
Total number of ESOPs to be granted
Identification of classes of employees entitled to participate in the ESOP Policy
Requirements of vesting and period of vesting
Maximum period within which the ESOPs shall be vested
Exercise period and process of exercise
Lock-in period, if any (lock-in period means the period during which the employee is not entitled to transfer the shares issued to him upon exercise of the vested options)
Conditions under which option vested in employees may lapse e.g. in case of termination of employment for misconduct
Specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of employee.
OFFER LETTER = ESOP GRANT?
Sorry for the digression. Coming back to my friend’s example. He had not created a ESOP Policy, but had just mentioned ESOPs as part of the compensation package for his employees, in their offer letter. This did not mean that the employee had been given or “granted” ESOPs. An employee officially gets ESOPs only when the company, after creating a ESOP Policy (duly approved by Board and Shareholders) issues a letter to the employee indicating the exact no. of ESOPs being given to the employee and the terms of such ESOPs. Till the time you, as a company have completed these formalities, you have only promised ESOPs to employees and not granted them ESOPs!
Also remember, delay in granting ESOPs would result in delay in vesting of ESOPs to employees, as there is a mandatory 1 year cliff on ESOPs under the Companies Act, 2013. So, a delayed ESOP grant means a delay in ESOP benefits accruing to the employees.
It is therefore important for every startup to create ESOP Policy at the earliest and actually grant ESOPs to their employees! #StartRight_RightNow!