Cashfree Payment Gateway: Startup ESOP Explained - Definition, Documentation, Processes

Startups often use ESOPs (Employee Stock Ownership Plans) to incentivise their employees to become part owners of the company by purchasing shares to align with their hard work and performance.ESOPs are not only being used in India, but are also gaining popularity globally. For startups, ESOPs are an excellent way to raise capital and boost employee retention. Let's dive deeper.

What is an ESOP in a startup?

The term ESOP refers to Employee Stock Ownership Plan. The company gives partial ownership in the form of shares to employees. Another meaning is employee stock options. It is important to note that these options are not shares of the company. It means that the employee has the right to buy shares of the company at a pre-determined price at some time in the future. Employees are granted ESOPs through a grant letter that contains information such as the exercise price, vesting details, grant date, etc. Employees are not obligated to purchase shares, but have the right to purchase shares in the company.

Startups actively use ESOPs to achieve a variety of goals, including:

Startups need capital, and if you offer shares to employees, you can get capital as well as improve employee performance.ESOPs are an excellent way to retain, motivate, and attract employees. Employees will work better for the growth of the startup when they become part owners of the company.

Legal Documents Required to Create a Startup ESOP

The following documents are required to create a startup ESOP:

How to Create a Startup ESOP

Firstly, you need to create an ESOP policy or programme through a professional. This will cover various terms such as vesting, pool size, exercise period, ESOP management, etc. You need the board of directors to approve the ESOP programme. The EGM (Extraordinary General Meeting) through a special resolution approves the ESOP programme. It is important to know that this should be a special resolution and not an ordinary resolution. You need to submit the special resolution and the EGM resolution to the ROC.Now, you are ready to grant ESOP to employees.

Frequently Asked Questions

What is an ESOP?ESOPs (Employee Stock Ownership Plans) help employees invest in startups by purchasing shares and thereby acquiring partial ownership.What is the purpose of an ESOP? ESOPs in startups serve two purposes. First, startups need capital, and offering ESOPs to employees helps them access that capital. Second, it motivates employees to perform better, work harder, and stay with the startup.Can ESOPs be offered to any employee? Startups can only offer ESOPs to permanent employees.Although there is no statutory definition of a permanent employee, as a practical matter, permanent employees have completed their probationary period. What documents are required to create an ESOP? The following documents are required to create an ESOP for a startup: Employment Agreement, ESOP Plan, Trust Deed, Option Grant Letter, Employee Acceptance Letter.Can an ESOP include prospective employees? Yes! An ESOP can also include prospective employees. Both current and prospective employees can join the plan. Prospective employees can join after the plan is approved.