An ESOP program is essentially a medium to long-term wealth creation plan, which has relevance even after more than five to seven years from the date of launch. And over such a long period, business, like life, has the tendency to throw surprises - sometimes good and sometimes not so pleasant. Hence, whilst launching an ESOP program, it is important to get the risk management right!

Proper risk management in an ESOP program includes understanding various risks and ensuring enough flexibilities for the Board and embedding the right clauses in the ESOP Scheme to tackle different situations. Below table gives a flavour of some of the risks / scenarios one should consider when implementing any ESOP Program.

Business / Strategic Risk
  • - Growing faster than expected, resulting in Liquidity Event taking place during vesting period 
  • - Not growing fast enough resulting in ESOPs becoming ‘out of money’ or ‘underwater’
  • - Too much grant upfront resulting in inadequate budgets for future grants to existing employees or new hires
Employee Risk
  • - Employee joining competition whilst holding shares or vested ESOPs of your Company
  • - Employee not performing well enough and yet benefiting from vesting of options
Legal / Documentation Risk
  • - Stringent ESOP scheme rules making it difficult to cater to emerging business needs and scenarios. For example, stringent rules for corporate transactions / liquidity events
  • - Non-compliance with various applicable rules e.g. SEBI rules, FEMA rules, provisions of Companies Act, etc.

Note that above is just an illustrative list and by no means exhaustive

Should you have any comments or thoughts or feedback, please feel free to share write to us. We would love to hear from you!

Vichitra Malhotra, FIAI

Founder and Consulting Actuary

v.malhotra@veritas-india.com

+91-9372876627

 

Disclaimer: The content is for informational purposes only and must not be reproduced, redistributed, or construed as a recommendation. It does not constitute advice on employee stock option solutions, valuations, or scheme preferences. We have reviewed the above and in so far as it includes information or facts, it is believed to be reliable though its accuracy or completeness cannot be guaranteed.