“How do I get my employees to think of my company as their own – when I’m bootstrapped?!” This burning question, which has long been in the minds of entrepreneurs, can be easily solved by providing employers with a new take on ESOPs! Employee Stock Option Plans are one of the most important forms of attracting, remunerating and retaining employees for any organisation. In providing this option to an employee, it yields two main benefits from the perspective of both, the employer and the employee.
From an employer’s point of view, it is increasingly beneficial to companies since it helps them to maintain liquidity, motivate and thereby improve productivity within the organisation and has major tax benefits and it also gives entrepreneurs the option to hire great talent, without having to commit to huge salaries. From an employee’s point of view, not only does it cost nothing to obtain, it also acts as a reward for reliability and motivation and gives the employee a sense of belonging and ownership of the company. This makes employees feel encouraged to work harder and think more like a business owner. This in turn helps the company grow and indirectly leads to profitability since the employee works more productively because their career growth is directly linked to the company’s growth. It is tremendously attractive as it provides the employee with major retirement assets.
While all this does sound perfect, the catch is that ESOPs oftentimes, are hard to understand and even harder to explain. A common misconception employees have is that just by having these stock options in the company, they will quickly become millionaires, although the fact that an employee will only benefit from this plan, post completion of the vesting period – a pre-defined amount of time working with the company in question – gets lost in translation. Additionally, another point that is often overlooked is a clause that is mentioned wherein, if the employee were to discontinue his employment at the company – prior to the completion of this vesting period, voids the agreement and leaves the employee with no monetary gains through the ESOP.
The most common reason for a company to be unable to provide ESOPs is because an employee will not know exactly how this option works and employers find it difficult to firstly implement and then to explain the plan, mainly pertaining to most of the complex details and the legal structure that is associated with it.
Although ESOPs have been available for a long time, but to implement this is a time and financially intensive process that start-ups oftentimes do not have the bandwidth to execute.
India has stringent laws in terms of granting and implementation of the policy and provisions for a simply exit strategy for companies who provide their employees with stock options. Aside from which, the cost of completing this process is extremely expensive.
At Vakilsearch, when we were recently exploring the option of providing ESOPs in-house, we came to realise that this whole concept is fairly confusing – being that it involves the expertise of 3 kinds of professionals; a CA, CS and lawyer; which inevitably makes this entire exercise very difficult to follow through with. This initiative to revolutionise the implementation of ESOPs had long been on our “to-do” list, however we were faced the hurdle of getting it into effect because of the cost – since a large part of our clientele are start-ups. Therefore putting it into effect would be so expensive that a practical amount would be quoted at a minimum of ₹2 lakhs! So our deduction was that we needed to somehow reduce the time needed and the costs as well so that any start-up would be able to finally use this option.
The final plan that we have come up with is to provide entrepreneurs with a step-by-step time frame in the most minimal cost possible. Additionally, we have now made this plan available with an payment by EMI option, thus allowing the startup to spread this cost over an extended period of time rather than paying a huge amount of money upfront. This will definitely open doors to entrepreneurs to start using ESOPs to benefit themselves and their employees, leading to a stronger and more effective start-up environment in India.