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STARTUP-ESOPs

This presentation covers ESOP as an option given to employee of a startup. Also, covering taxation and legal requirements of ESOPs

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STARTUP-ESOPs

  1. 1. Copyright © 2016 CrawlSpring All Rights Reserved. 1 STARTUPS- EMPLOYEE STOCK OPTION PLANS(ESOPs) Crawlspring Share your idea, we will do the rest StartUp Crawlspring Share your idea, we will do the
  2. 2. TABLE OF CONTENTS Copyright © 2016 CrawlSpring All Rights Reserved. 2 # TOPIC Page 1 Introduction 3 2 Taxability of ESOPs 4 3 When to accept ESOPs 5 4 Steps for creating ESOPS 6 5 Legal Documents required 7 Crawlspring Share your idea, we will do the
  3. 3. INTRODUCTION Copyright © 2016 CrawlSpring All Rights Reserved. 3Crawlspring Share your idea, we will do the Although early stage businesses usually do not have the adequate resources to match the competitive salaries paid by large corporations, they require proficient human capital. ESOPs provide an incentive to prospective employees to work with startups. What is an ESOP? An Employee Stock Option Plan (ESOP) is an option given to an employee to purchase a quantity of a company’s stock at a set price for a certain period of time. The right of the employees is by way of an entitlement to exercise his/her option and buy shares in the Company. The said price at which the employee buys the option could be and is usually lower than the prevailing price of the share in the market. While ESOPs might seem very attractive to an employee joining a Start-up, it is advisable to check few points as to when they should accept ESOPs mentioned in the Slide 5 of this presentation. Unlike at larger corporations, employee ownership is an essential element in startup communities, especially in Venture Capital(VC) deals. A stock option pool is a prerequisite to closing a deal on a fully-diluted-basis. In other words, the quantity of shares issued to the VC are arrived at only after the other commitments on share capital are finalized. 1 2 3 5 4
  4. 4. TAXABILITY OF ESOPS Copyright © 2016 CrawlSpring All Rights Reserved. 4Crawlspring Share your idea, we will do the It is important to know the scalability of the idea before accepting ESOPs from an early stage startup. Also, evaluate whether the company shall remain in market for a period of at least four years. Startups should mention tax implications to all new employees before giving them an option to get ESOPs as there will be considerable tax consequences for an employee. There are many employee or individual who wanted to become a part of a startup but are not aware about the implications of tax. Treatment of tax depends upon various factors such as: A. Type of option issued B. Event on which such option is granted or exercised C. The time of resigning It is suggested that an experienced startup lawyer should be engaged when drafting a scheme of ESOP or employment contracts and any ancillary agreements. 1 2 3
  5. 5. WHEN TO ACCEPT ESOPs Copyright © 2016 CrawlSpring All Rights Reserved. 5Crawlspring Share your idea, we will do the 1. First understand the terms mentioned in the option: •Number of Shares : The total number of options granted to an employee •Strike Price : The price the employee must pay to purchase each share at the time exercising the option •Vesting period : The period over when the options become wholly owned and exercisable by the employee •Cliff Period : In this period vesting accrues, but the total effect of this vesting is realized after the cliff •Expiration Date : The last date on which the options may be exercised 2. Scope of a startup: To check on the viability of the idea 3. Uniqueness of its idea: To check if the Business Idea of the Startup is validated and solves genuine problems. 4. Tax implications : These options are considered as a part of an employee’s perks and taxed accordingly 5. Terms of employment : Read the terms carefully. When in doubt, clarify from a legal expert
  6. 6. STEPS FOR CREATING ESOPs Copyright © 2016 CrawlSpring All Rights Reserved. 6Crawlspring Share your idea, we will do the 1. Constitution of a Compensation Committee: The board of directors must convene a board meeting to constitute a compensation committee to draw up the detailed terms and conditions of the ESOP. 2. Framing of the ESOP Plan: The Compensation Committee shall meet and frame the ESOP as per the statutory guidelines. 3. Approval of the ESOP plan by the board and requisitioning of a general meeting. 4. Shareholder approval: Whenever shares are issued to a specific person and not proportionately to all the shareholders of the company, the company must obtain shareholder approval by a special resolution. 5. Compensation Committee meeting for grant of options and other formalities: A meeting of Compensation Committee must be held to determine names of employees to whom the options shall be granted. Letters of grant shall be issued to the employees. The committee must ask for letters of acceptance of the options, and an undertaking from employees to comply with the ESOP scheme.
  7. 7. LEGAL DOCUMENTS REQUIRED Copyright © 2016 CrawlSpring All Rights Reserved. 7Crawlspring Share your idea, we will do the 1. Employment agreement: The employment agreement usually specifies that the board has the discretion to grant such options to the employees as it deems fit. 2. ESOP Plan: The ESOP Plan is the plan which lists out the features and the terms of the ESOP scheme. 3. Trust Deed (if the ESOP is administered by a trust): If the trust route is used for the ESOP Plan, a trust deed for creation of a trust to hold the shares is required. 4. Letter of grant of options: Options are conferred by a letter to the employees furnished by the board of directors of the company. 5. Letter of acceptance by employees
  8. 8. CONTACT US Copyright © 2016 CrawlSpring All Rights Reserved. 8Crawlspring Share your idea, we will do the Priyanka Gera FOUNDER Pri.gera05@gmail.com +91-9899002082 Pranav Manaktala CO-FOUNDER manaktalapranav@gmail.com +91-8010803060

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