A dedicated workforce is essential for any firm, large or small, especially a startup. An ESOP (Employee Stock Ownership Plan) pool is a means of attracting talented people to a startup; if the employees help the company become successful enough to go public, they will be compensated with shares.

Companies deem it vital to create an ESOP pool to attract, motivate, and retain talented employees while aligning their interests with the company's growth. Once the ESOP pool is created, understanding how are ESOP shares allocated is an equally crucial step for any company.

An ESOP pool is made up of equity shares reserved for employees of a private company. In order to maintain consistency in terms of ESOP pools created by companies, SEBI (Securities and Exchange Board of India) has laid down guidelines for companies/organisations in India.

How are ESOP shares allocated?

ESOP shares are allocated through a process known as a grant. In this process, the company's board of directors or the compensation committee decides how many shares will be granted to each employee, and under what terms.

• The grant is typically based on the employee's job level, performance, and tenure in the company.
• Once the grant is approved, the employee receives an award letter that outlines the terms of the grant, including the vesting schedule, the exercise price, and the expiration date.
• The vesting schedule determines when the employee can exercise the option to purchase the shares.
• Typically, vesting occurs over a period of time, such as four years, with a portion of the shares becoming vested each year.
• The exercise price is the price at which the employee can purchase the shares. This is usually set at the market price on the date of the grant.

SEBI guidelines for ESOP pool

SEBI (Securities and Exchange Board of India) has laid down guidelines for companies that want to create an ESOP (Employee Stock Ownership Plan) pool. These guidelines include:

• Companies must have a minimum net worth of ₹10 crores to create an ESOP pool.
• The maximum limit of the ESOP pool cannot exceed 10% of the issued capital of the company.
• The ESOP plan must be approved by the shareholders of the company through a special resolution.
• The ESOP plan must have a vesting period of a minimum of one year and a maximum of four years from the date of the grant.
• Companies must disclose all the details of the ESOP plan to the shareholders in their annual reports.
• The exercise price of the options granted under the ESOP plan must be determined by the company's board of directors or a committee constituted by them.
• Companies must disclose the details of the ESOP plan in their annual report, including the number of shares granted, vesting schedule, exercise price, and impact of the ESOP plan on the earnings per share of the company.
• The total number of shares granted under the ESOP plan cannot exceed 5% of the total equity shares of the company in a financial year.

Conclusion

An ESOP pool can help attract and retain talented employees and align their interests with the company's growth. The above-mentioned guidelines are designed to ensure that companies understand ESOP pool meaning and create ESOP plans in a transparent and fair manner and that the interests of the shareholders and employees are protected. Companies must comply with all the other SEBI regulations related to ESOPs and employee benefits.

Fi Money is a fintech company that is building the future of finance in India. We are a fast-growing company with a team of talented and passionate employees. We offer a competitive salary and benefits package, including ESOPs for all full-time employees. We are also committed to mentoring and career development. Join us to learn, grow, and build together.

Frequently asked questions

1. How do you make an ESOP pool?

To create an ESOP pool, a company needs to follow the guidelines laid down by the regulatory authorities. They need to seek necessary approvals, set up a trust, and define the terms and conditions of the scheme. The allocation of shares is then made based on the criteria set forth in the ESOP scheme, such as performance, seniority, or a combination of both.

2. How do I create an ESOP scheme?

To create an ESOP scheme, you need to follow SEBI guidelines and get approval from the board and shareholders. You also need to determine the number of shares to be allotted, the vesting period, the exercise price, and other terms and conditions. It is recommended to consult with legal and financial advisors to ensure compliance and effective implementation of the ESOP scheme.