(DIY) Making ESOPs Matter
(DIY) Making ESOPs Matter
(DIY) Making ESOPs Matter
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To win in the marketplace
you must first win in
the workplace.
- Doug Conant
Former President & CEO, Campbell Soup Company
+92%
1.9
+57% X +62%
3.4 X X X
ESOP Companies
Non-ESOP
Non-ESOP
Non-ESOP
S&P 500
ESOP
ESOP
ESOP
Average Tenure Average Average Increased
in the company Household Returns Growth
in years Income 2002-12 over 10 years
WHAT IS AN ESOP Defines the coverage
of employee levels of In order to use the method,
the plan, e.g., senior you need to be registered as a
management only in corporation with shares or
this case. similar stock units.
median household wealth of employees across industries 83% company’s stock value increased on
external appraisals
employees provided with other benefits additionally 77% impacted employee morale and on-
job performance
Allows employees to become share Allows employees to become share Mimics equity interest but without
holders at a future date and at a pre- holders today but applies restrictions on altering or modifying the cap table to
determined price, usually lower than the the transferability or ownership to incentivise employees for current and
fair market price. safeguard company interests. future performance.
Investors would want me to Flexibility to operate and option I believe their contributions are
have ESOPs to retain talent. to buy-back is paramount. specific to certain areas mostly.
We are expecting to go public/ I need to reserve certain rights Stock dilution may impact me
Need
get acquired someday soon. as my investor wants them. negatively in this scenario.
help?
Investopedia
RESOURCES
SOME HOT TERMS GRANT Issuing a stock option award to an employee usually read in
conjunction with his employment agreement and statutes
Need
help?
ESOP Cheat
Sheet
Alexander Jarvis Blog 50
Schedule of when what portion of Folds on ESOP Terms
Vesting Schedule
The time period that an stock becomes eligible for exercise
employee needs to wait for/ Procedure for premature vesting in
milestones which need to Accelerated Vesting
situations such as buy-out/ merger
VESTING be reached/ performance
Single/ Double Trigger of sale +/- ESOP, The
that needs to be delivered Trigger Vesting
employee exit that leads to vesting
when the employee can Employers
Time period during which no Perspective
apply to receive the stock. Cliff Vesting
vesting happens till a certain date
Cleartax Blog on Key terms in
ESOPs and what they mean
Act of buying the stock unit Time period when option holder
Exercise Period
by paying the ‘Exercise
EXERCISE
can apply to receive stock units
amount’, if any, to convert the Period for which the Exercise Regulators
vested options to actual stock Maturity & ESOPs in
period stays open
India
Nishith Desai Associates
whitepaper on ESOP terms
Set up an ESOP
Committee with
members from Founding
team, KMP & HR
BEING OBJECTIVE Structure is based on the goal of the plan,
e.g., retention as a key goal would define
length of vesting cycles/ encouraging
ownership would define the exercise price.
A simple
Defines the coverage
of employee levels of To encourage, motivate comprehensive
the plan, e.g., senior
management only in and retain employees single sentence
this case.
contributing to the objective
overall management by statement
enabling ownership A single sentence goal
statement allows all
This is important to
while allowing them to stakeholders to be on the
decide on the type of
plan, e.g., using a
accrue personal wealth same page as to why the
proposed plan is being setup
Phantom stock award
when ownership is
and gain from the and who it wishes to reward/
incentivize. This ensures that
not the objective. growth of the company. future stakeholders are also
This allows to decide on the in the know and aligned to
This defines the performance
goals that the plan may be quantum, tenure and conditions the long-term objective.
attached to, e.g., revenue goals, for exercise, e.g., holding period
investment goals or profit goals. lengths before sale.
Set up the Analyse the Establish the Draft the Structure Communicate
single line impact on legal ESOP Scheme Awards to the awards
objective everyone framework & Rationale incentives right
ANALYSE THE IMPACT
RESOURCES
Impact on future cash
ON THE COMPANY Timing of grant and plan,
flows, Ability to right communication to
compensate in cash, Tax employees, management
The Hartford considerations at time of perception of risk factors,
NON-FINANCIAL
Magazine on
ESOPs
exercise, Cost of setting growth path visualized,
ESOP factors to consider and the up and administration, need to having loyalty
FINANCIAL
next generation
EVALUATE
SEBI granting of ESOPs
Regulations
on ESOPs Determining the Transferability, -
Employee stock option Minimum Vesting Decision on Lock-
scheme and employee Exercise Price Non-transferable, or
Period in-period post
stock purchase scheme
(accounting norms cannot be
guidelines, 1999 of 1 year from grant exercise
and incentives) encumbered
Setting up the
scheme
Changes in
Tax on ESOPs, Maintenance of
Forbes India Exercise conditions, Forfeiture/Refund on
Registers
Changes in Tax Structure Will process, legal heirs, expiry/ non-fulfilment
Impact ESOPS of Employee Stock
incapacity of vesting conditions
Grants, Exercise
Clarifying
exercise
How ISOs are
taxed, The
Balance Disclosures in BoD Disclosures of the Variation from the
Taxation and impact on ISOs in
US and under the tax reforms
Report Scheme ESOS
summary of movement & Framework -Execution Approval by special
financial impact - Reporting resolution
Communicating
ISO taxation to stakeholders
detailed,
TurboTax
Taxation and impact on ISOs in
US and under the tax reforms
Set up the Analyse the Establish the Draft the Structure Communicate
single line impact on legal ESOP Scheme Awards to the awards
objective everyone framework & Rationale incentives right
Obtain approval of
ESOP Committee of
Plan, Coverage and
Quantum
RESOURCES
Segment your
DECIDE AWARDS 1 teams by
function/ role
Founding Team/
CXOs
Senior Team/
VPs & Above
Functional
Teams
Support
Teams ESOP Best
Practices,
Accion
Define Best practices, model
2
Wealth examples, terms and
Rationale for % ownership $ incentives $ incentives calculators
Awards
accretion
Co-founder
Assign option Negotiate Equity
3
X times X times Calculator,
multiplier for Negotiate + X times Base
Base Salary Base Salary Foundrs
contribution Salary Objective way to assess
value of co-founders &
founding team
% holding at
maturity
X Base Salary Base Salary Co-founder
Assign $ value Valuation at $ value of holding X X
4
Equity Split,
to stock maturity + Option Multiplier Option Multiplier Gust
options X $ value of award = = Objective way to assess
value of co-founders &
=
$ value of holding
Getting the
% holding $ value of award $ value of award value of stock
Compute X # of equity units / Last Base Value / Last Base Value options,
5 Awards
offered
Total Equity Units
=
of methods to left
& right
discovered x Total
Equity Units =
discovered x Total
Equity Units =
McKinsey
How to get the most of
your stock option pool
and awards
Need
help?
Set up the Analyse the Establish the Draft the Structure Communicate
single line impact on legal ESOP Scheme Awards to the awards
objective everyone framework & Rationale incentives right
Obtain approval of
ESOP Committee
and Compensation
Committees
RESOURCES
Segment your
DECIDE AWARDS 1 teams by
function/ role
Founding Team/
CXOs
Senior Team/
VPs & Above
Functional
Teams
Support
Teams ESOP Best
Practices,
Accion
Define Best practices, model
2
Wealth examples, terms and
Rationale for % ownership $ incentives $ incentives calculators
Awards
accretion
Co-founder
Assign option Negotiate Equity
3
X times X times Calculator,
multiplier for Negotiate + X times Base
Base Salary Base Salary Foundrs
contribution Salary Objective way to assess
value of co-founders &
founding team
% holding at
maturity
X Base Salary Base Salary Co-founder
Assign $ value Valuation at $ value of holding X X
4
Equity Split,
to stock maturity + Option Multiplier Option Multiplier Gust
options X $ value of award = = Objective way to assess
value of co-founders &
=
$ value of holding
Getting the
% holding $ value of award $ value of award value of stock
Compute X # of equity units / Last Base Value / Last Base Value options,
5 Awards
offered
Total Equity Units
=
of methods to left
& right
discovered x Total
Equity Units =
discovered x Total
Equity Units =
McKinsey
How to get the most of
your stock option pool
and awards
funding stages
18 .0 0%
16% 16 .0 0%
$1 0.00
$10.26 14 .0 0%
$8 .00 12 .0 0%
11%
10 .0 0%
$6 .00
9%
8.00 %
$5.69 7%
$4 .00 6.00 %
4.00 %
$2.51
$2 .00
2.00 %
$1.17
$- 0.00 %
Changes in
Grant Option Award Exercise Tax
status/ tax/
Information Plan Agreement Process Implication
notification
Presented
Written Townhall Written Video Presented
Paper/ Email Paper Instructional Townhall Verbal
RIGHT MEDIUM
Video
Instructional
most effective
most used
least effective
Starbucks’ communication of their stock option plan is right on. Clear, concise and friendly in demeanour. This
enables all employees to be clear and refer to it for any clarifications.
harm
with your ESOPs
BENCHMARK
STUDY
Now, can Prequate
help? strategic
Of
management
ESOP
AUDIT ESOP
VALUE STUDY
course GRANT
ESOP
REVIEWS
STRUCTURING
Click this if you need some help on your ESOPs right Click this if you think you need help on something else
away. that we could help with.
Prequate is a management ^ finance advisory that acts and manages as a Business Finance, Strategic Finance & Management Assist
group. Over the last 8 years, Prequate has worked with 350+ businesses in 25+ industries across 20+ countries and has been covered
by various publications for its breakthrough approaches. Strategic finance for business impact.