Setting up your ESOP pool as an Indian company

According to Saison Capital’s report, ‘The State Of ESOPs In India – 2021’, which surveyed 268 startups from India, 238 surveyed companies didn’t know about ESOPs and what they entail. It noted that the lack of knowledge about ESOPs is the biggest roadblock in its wide-scale adoption.

EquityList is at the center of equity management, so we have taken this roadblock seriously. As part of our efforts to solve for it, we have started an ESOP 101 series to dive deep into various equity-related incentive plans to benefit companies and their employees.

What is Equity Compensation?

Equity compensation is fundamentally a non-cash incentive offered to employees as ownership in the company. It is seen as a reward to employees for their long-term association with the company, thus, acting as a great talent acquisition and retention method. The most commonly adopted equity compensation plans are Restricted Stock Units (RSU), Stock Appreciation Rights (SAR), Employee Stock Option Plans (ESOP), and more. In this post, we’ll uncover the steps involved in adopting ESOPs as a company registered in India.

ESOPs are rights granted to the employees to purchase the company's equity shares at a predetermined discounted price on a predetermined future date. ESOPs are granted out of an ESOP Pool, which the company's board must approve.

One of the crucial elements to getting started with ESOPs is setting up an ESOP scheme. A scheme document records all the terms and conditions associated with the ESOPs offered to the employees, right from the total number of units being authorized by the company (known as the Option Pool) to what happens to the vested units of an employee after they leave the company.

With best practices in mind, we at EquityList have templatised the ESOP scheme and can help you set up the one that works the best for you and your employees.

Steps to Set Up an ESOP Plan

A private limited company needs to set up its ESOPs in India, complying with the Companies Act, 2013 and rules made thereon. Keeping this in mind, here’s how you can get an ESOP issue started:

1. Draft an ESOP scheme document

2. Alter the company’s Article of Association (AOA), if AOA is silent on the issue of shares to employees under the ESOP scheme

3. Alter the company’s Memorandum of Association (MOA), if the MOA does not have adequate authorized share capital

4. Convene a Board Meeting of the company for the following actions:

• approve the ESOP scheme
• approve the altered AOA and MOA subject to approval by members in the Extraordinary General Meeting (EGM), if required,
• approve the draft notice of the EGM
• authorize any person to send the notice of the Extraordinary General Meeting to all the members of the company (Get our expert advice here)

5. Dispatch of Notice of EGM to its Board members at least 21 days before the date of the EGM

6. Hold the EGM:

• for issuing of employees' stock option scheme by the shareholders of the company by passing an ordinary resolution for Private Companies and a special resolution for public companies
• for approving the altered MOA and AOA by the shareholders of the company by passing a special resolution

7. File an e–form MGT-14 to submit the special resolution within 30 days of passing the resolution

At the time of issuing any new grant, the company needs to hold a general meeting and seek approval of shareholders to grant options:

- to employees of a subsidiary or holding company; or

- to identified employees, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of the option

Note: You can also set an ‘authorized’ person, also referred to as ‘authority’, chosen by the company’s board to implement, administer, and monitor the ESOP scheme and approve new grants offered to employees.

At this time, the company should have the valuation report from the Registered Valuer to determine the Fair Market Value. The details of any grants to employees, directors, or officers of the company are maintained in the ‘Register of Employee Stock Options’ in Form No.SH-6.

‍Stay tuned for the next blog!