Download - ESOPs for Startups by Rodinhood
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ESOPs for Startups!
Guidelines and References
Alok Rodinhood Kejriwal Oct 2012
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Who is this meant for? Entrepreneurs who need guidance on ESOP ideas and policy for their Company. Employees who need to understand what ESOPs are, and how they work. People elsewhere in the business ecosystem, who may have questions on ESOPs and its core principles. Anyone interested in learning about a very interesting and valuable capital idea that has been responsible for creating massive wealth for employees and employers!
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Disclosures:
The principles and guidelines spoken about in this presentation are used and adopted strictly for the 2win group of companies that I operate/have invested in. There are various alternative interpretations of ESOP best practices that other companies and employers may adopt. This document should serve as a guideline and reference -‐ not as a rule book!
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Credentials (proof of success)
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Content flow 1. What are ESOPs?
2. Why are ESOPs important?
3. Who gets them?
4. On what basis are they issued?
5. At what cost are ESOPs issued?
6. When and how are they given out?
7. What happens if you leave in between?
8. Documentation/checklist for ESOPs
9.
10. Danger Signs
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What are ESOPs?
ESOP means Employee Stock Option Plan.
the Company they are working for.
the plan of the Company issuing the ESOPs.
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Why are ESOPs important?
The shares of Startups and unlisted companies become quite valuable as the business scales rapidly and becomes successful. Unlike salaries which cost real cash, shares have
them to work for the Startup.
via listing and acquisition deals.
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Who gets ESOPs?
a company is entitled.
ESOPs Even founders are entitled to ESOPs over and above their original shares it can be an additional incentive for them to earn more shares in the Business.
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On what basis are ESOPs given?
basis: The last price of the shares of the Company, as invested in by an investor. A proportion to the salary of the employee.
We sold shares in the last round at Rs. 5000 per share to an investor. You work at a salary of Rs. 7 lacs per annum.
-‐ We will propose allotting you 150 shares, valued at Rs. 7.5 lacs
(150 shares x Rs. 5000 per share)
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At what cost are ESOPs allotted?
As a policy, we allot shares to our employees at a base price Rs. 1/-‐ per share (being the minimum value that you need to pay for buying shares).
In the previous example, we would need you to pay the Company only Rs. 150/-‐ for the shares that are actually worth Rs. 7.5 lacs
We DO NOT believe in pricing our ESOPs beyond Rs. 1/-‐ simply because our business is not listed.
What VCs pay per share is subjective and that can be used
not to extract a cost from them.
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When are ESOPs allotted?
st of November 2012. The first lot of ESOPs will be available to you AFTER 1 year of completed service. This availability is termed as
You will complete your cliff in October 2013. We grant ESOPs in April and October cycles, so you will be entitled to your ESOPs beginning October 2013.
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How are ESOPs allotted?
ESOPs are earned in equal installments over a period of employment of an employee (as mentioned in the vesting schedule given to you by the Company when you are granted ESOPs). This
Our policy is a 3 year vesting, earned out in 2 half yearly installments. This equals to shares vesting in 6 installments over 3 years.
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How are ESOPs allotted?
In your case, you would get 1/6th = 25 shares in each October and April of the years after your 1
You need to buy your vested shares from the Company at the regular vesting schedule by paying for shares at the value fixed by the Company as
value of the shares).
Once to you by the Company and a share certificate is issued to you for the allotted shares.
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What happens if you leave the Company in between?
If you leave before the end of the first year and do not cross the cliff, you do not get any shares in the Company.
Post the completion of the first year, you get shares depending on the 6 half yearly installments that you have crossed and earned.
cliff. Then, you are entitled to 2 installments of 1/6th shares each, equaling 1/6th + 1/6th = 1/3rd shares when you leave the Company. As per the example, this would mean 50 shares are vested.
When you leave the Company you need to claim your vested shares.
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What happens if you leave the Company in between?
To claim your vested shares, you need to pay for the shares following which the shares are allotted, printed and handed over to you.
All ESOPs mention a deadline period for you to pay for your vested shares and get them allotted. In our case we have a 30 day period post last date of employment, by when you need to pay and get your vested shares.
If your finance or HR is kind and sincere, they SHOULD remind you of your vested ESOPs.
If your ESOPs are not claimed by you during this period, they legally get cancelled!
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Checklist for ESOPs:
approved by the SHAREHOLDERS in a meeting with proper resolutions. A sufficient ESOP pool should to be created with enough shares that last for at least 5 to 7 years of operations. Typically, the ESOP pool should be approx. 10 % to 15% of the share capital of the Company. The grant letter, the vesting schedule and the entire plan should be a part of the document set given to employee when granted ESOPs.
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General Concepts explained
Why is a cliff imposed? There are 2 reasons: 1. As a new employee, you need to prove your commitment and value to the Company before it rewards you in terms of precious equity.
2. Remember that the Company was valuable before you joined, and so you need to add value to it to be able to participate in its returns. You need to invest your time and efforts in the Company also.
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General Concepts explained
What can be your real gain? 1.
150/-‐ and buy 150 shares.
2.Rs. 5000 per share. After 4 years, the Company gets acquired at say Rs.20,000 per share.
3. Your value of your shares will be Rs. 30 lacs!
4. In your case, the salaries you will have earned in the 4 years would be approx. Rs. 34 lacs (Rs. 8.5 lacs per year as a blended average) and you will have further gained Rs. 30 lacs value in ESOPs!
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Questions & Answers
A: As per the rules, you cannot get shares without paying some moneys to the Company.
Q: Can I get more shares via ESOPs beyond the lot that was promised after my first year?
A: Yes of course! The idea is to compensate employee performance with regular issuance of new ESOPs.
also realize that your first lot of ESOP shares also grows each year in value!
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Questions & Answers Q: What about taxes? Are there some complications? A: When ESOPs are vested and you claim the ESOPs for allotment, you will
be taxed for the taxable value of ESOPs as part of your salary perquisite.
e.g. If you pay Re. 1 (Face Value) per share and value per share as per valuation report or last transaction is Rs. 5000, you will have to pay tax as per your salary slab (1%, 20%) on the perquisite value i.e. on Rs. 4999/-‐ (Rs. 5000 LESS Re. 1).
Now, at the time you sell your shares (for Rs. 20,000 per share), you will have to pay tax on the gain amount (Rs. 20,000-‐Rs. 5000 x No. of shares) as capital gains, as you would for any income from sale of shares.
Q: Can I sell my shares to others? A: It depends on the popularity of the shares and the market.
possible but it could also depend on Company policy. Closely held and private Companies restrict transfer of shares.
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Questions & Answers
Q: How do I know what % of shares I have in the Company?
A: This is a tricky one. Most employees will not know and not important, as long as you trust the management to be fair in telling you what the value of shares was when VCs invested, and how many shares you are getting.
Please note that when senior & director level appointments are made, % are decided.
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Watch out for: The management keeps postponing and formalizing ESOPs. Either they are being greedy or lazy or have not been able
You SHOULD receive printed share certificates of your holdings once a year. We do it as a rule. INSIST on getting your shares and written confirmation of holdings before you leave.
understand.
Figure out whether ESOPs are being given to everyone and
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Thanks!
Special thanks to 2win CFO Satish Iyer ([email protected]) for helping validate this document and administering 2win ESOPs!
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