If you have been following our updates, you would know that we strongly believe in getting mathematics and risk management right when launching your ESOP Program. Having done the same, the next critical contour in the launch journey of ESOPs is getting your documentation right!

In our view, whilst detailed rules on the working of ESOP Program under different scenarios need to be well thought through and agreed as part of the ‘mathematics’ and ‘risk management’ phase, bringing these together in the form of right documentation needs to be done in a balanced manner. The scheme needs to be clear and detailed enough for the employees whilst giving enough flexibility and protection to the board for the future uncertain scenarios.

Below is a quick snapshot of three (amongst many) critical areas in an ESOP scheme that need to be drafted carefully:

Liquidity Event Rules (For Private Companies)
  • - Flexibility to Board to decide exact treatmentof ESOPs for in-service and ex-employees on happening of Liquidity events whilst protecting employee interests 
  • - Flexibility to enable accelerationof vesting in future
  • - Avoiding prescriptive rules, as the exact nature of future transactions can never be predicted in advance
Treatment of Vested Options

Clearly defining treatment of vested option if no-Liquidity event takes place separately for:

  • - In-service employees;
  • - Employees leaving within 1 to 2 yearsversus employees leaving after completing full vesting period;
  • - Retirees / treatment in case of any unfortunate event with employees
Compliance Aspects
  • - Ensuring scheme rules such as minimum vesting period, treatment of ESOPs in case of death or disability of employees, category of employees eligible etc. are in line with the Companies Actand where applicable SEBI rules and FEMA requirements are ensured
  • - Ensuring the scheme adoption process follows due course

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 above content has been furnished solely for information and must not be reproduced or redistributed. It should be noted that we are not soliciting any action based upon it. Also, it does not constitute any recommendation. In particular, the information above is for general purposes only and is not an advice on employee stock option solutions valuations or preference of one scheme over another. The information given above is in summary form and does not purport to be complete. 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.