Entrepreneurship

Employee Stock Options For Today’s Entrepreneurs

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Vakilsearch’s Founder and CEO Hrishikesh Datar gives us insights into how entrepreneurs can give their employees the support and motivation to be their best professionally, through ESOPs! Employee Stock Option Plans are one of the most important forms of employee remunerations. ESOPs have two main benefits, from an employer and an employee’s point of view. For an employer, it helps to maintain liquidity and for an employee, it acts as a reward for loyalty and motivation. The catch being that ESOPs oftentimes are hard to understand since an employee will not know exactly how this option works and employers find it difficult to implement the plan and then to explain the intricate details and the legal framework that is associated with it. So that, at the end, employees tend to believe that they will become millionaires just by being provided with a stock option. ESOPs also come with a vesting period – which basically is a lock-in period. This means that the employee can only benefit / exercise the stock options after this pre-defined amount of time. Also if for any reason the employee leaves the company prior to the lock-in period, the stock option is lapsed, leaving the employee with no gains at all.

hrishikesh_dIn today’s start-up age, entrepreneurs find that this option is increasingly beneficial since apart from helping maintain liquidity, it also gives entrepreneurs the option to hire great talent. Also in providing the employee with an “ownership” feeling, it motivates them to work harder to help the company grow, because their growth is now linked to the growth of the company. The fact that India has stringent laws in terms of granting and implementation of the policy and provisions for a simply exit strategy for companies who provide their employees with stock options. Aside from which, the cost of completing this process is extremely expensive.

For Vakilsearch, when recently exploring the option of providing ESOPs in-house, they realised that it was rather confusing – since it involved requiring the expertise of 3 kinds of professionals i.e. a CA, CS and lawyer; obviously making this entire exercise time and cost intensive. The idea of revolutionising the implementation of ESOPs had long been on their “to do” list, however they were unable to get into it because of the cost – since a large part of the clientele were new companies, most of whom did not want to spend a huge sum of money on these kinds of legal compliances at such an early stage. This exercise is so expensive that usually a reasonable quote would be upwards of ₹2 lakhs! Now start-ups are provided with the option to complete the entire ESOP process within a record amount of time and within ₹49,999. Additionally this plan is also available with an EMI option, thus allowing the startup to spread this cost over an extended period of time rather than paying a huge amount of money upfront.

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