Employee stock options: What startups should know

By Rajesh Begur, ARA LAW

Employee stock option plans (ESOPs) are being widely used by both public companies and startups as a means of monetary compensation and to provide incentives for employees. While startups use employee stock options in order to attract talent on account of not being able to afford high salaries and to manage direct cost, publicly traded companies use such plans as a retention tool. The wealth creating potential of ESOPs has been highlighted by reports about how they have created millionaires of employees at Infosys and the likes of Flipkart.

Rajesh Begur is the managing partner of ARA LAW, a first-generation law firm with offices in Mumbai and Bengaluru.
Rajesh Begur is the managing partner of ARA LAW, a first-generation law firm with offices in Mumbai and Bengaluru.

Globally, companies adopt one or more of the following types of plans, depending on their business requirements and objectives: (a) employee stock option scheme (ESOS); (b) employee stock purchase plan; (c) restricted stock units; (d) stock appreciation rights; and (e) phantom stocks. In India, the most commonly used ESOP vehicle by private companies is the ESOS. Also, ESOP structuring can be done by setting up a trust based on commercial and tax considerations.

Statutory compliance: It is mandatory for every private company and public unlisted company that proposes to issue employee stock options to employees to have in place an ESOP scheme that is in consonance with section 62(b) of the Companies Act, 2013, read with rule 12 of the Companies (Share Capital and Debentures) Regulations, 2014 (ESOP Regulations). Prior to the ESOP Regulations, there was no legislation regulating issuance of ESOPs by private companies. Public listed companies, however, have been governed by the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014.

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