In a COVID-normal era, employees are seeking greater flexibility and benefits from their workplace. Implementing an Employee Share Option Plan (ESOP) can be an effective way to keep employees engaged and incentivised. This article explains what an ESOP is, and how you can implement one in your business.
What is an ESOP?
An Employee Share Option Plan or Employee Stock Ownership Plan is a scheme which gives employees options to acquire shares in your company. As the value of the company grows, so does the benefit for the option-holder.
What are the benefits of implementing an ESOP?
Implementing an ESOP is advantageous for companies looking to attract, retain and reward their employees. With a direct interest in the success of the company, employees are motivated to perform better and remain loyal to the business. Employee share schemes are particularly helpful for start-up companies, who may not have the resources to provide high salaries but can still attract strong employees with share ownership.
What are ESOP rules?
ESOP Rules are a legal document which set out the rules of the stock ownership scheme and rights and obligations of option-holders. Key questions which your Rules should address include:
- Who is eligible to participate in the scheme?
- How are options exercised?
- What are the vesting conditions?
- What happens to the options if employment with the company ends?
- How does the scheme interact with other company documents?
What are vesting conditions?
Vesting conditions are requirements which must be satisfied before the employee can exercise their option to acquire shares. These must be set out clearly in the ESOP Rules, and may include:
- Completion of a certain period of employment with the company
- Achievement of specific performance targets
- Completion of a specified project
How do I make an option offer?
After implementing ESOP Rules, you can issuing a Letter of Offer to employees. This sets out key terms of the offer, including the number of options and how the offer can be accepted by the employee. Importantly, a copy of the Rules should be attached to the Letter of Offer.
- An ESOP is a scheme which gives employees options to acquire shares in your company.
- Employee share schemes can help attract, retain and reward employees, as workers have a direct interest in the company’s success.
- To introduce an employee stock ownership scheme, you must implement ESOP Rules and provide a Letter of Offer to employees.
What should I do next?
If you are considering an employee share scheme, it is critical to have a well-drafted set of ESOP Rules and Letter of Offer.