An Employee Share Option Plan (ESOP) is a method of granting equity in a business to an employee over a period of time. It really is as simple as it sounds – the employee receives options (or rights) to be granted real shares in the business, as long as they comply with the rules of the ESOP (Plan Rules).
While there are multiple variations of employee share plans around (for example, an Employee Share Scheme whereby the employee is granted shares from the start rather than options, or a Phantom Plan where an employee is awarded in cash, based on the increase in value of the company), the ESOPs are the most common form of employee incentivisation for small and start-up businesses.
In our experience, an ESOP often represents the best way to incentivise an employee’s performance, whilst still allowing the company to maintain the control it desires and not tying it down with admin.
So what are the benefits of an ESOP?
So if ESOPs are so worthwhile, why doesn’t every company have one?
We have set out below the most common concerns we hear in relation to ESOPs, and in general, most are fueled by simple misunderstandings.
“What if an employee leaves – I don’t want ex-employees leaving with equity in my Company”
Most ESOPs contain general ‘buy-back’ provisions, which allow the Company to buy options and shares back from employees in certain circumstances. One of those circumstances is when the employee leaves. ESOPs will specify the price that will be paid for those shares, often based on whether the employee was a ‘Good Leaver’ or a ‘Bad Leaver’. As mentioned above, these terms can be completely personalised for the Company, to cover any hypothetical scenario it may have in mind.
“How do I know the value of the options? I don’t want to give too much away?”
Cake can help you to get valuations for your company to be used in your ESOP. For example, Cake can get you an ‘ESS Valuation’, that, if your company is eligible, will allow your ESOP to come under the Start-Up Tax Concession, and provide tax benefits to employees.
It can also assist with providing a valuation to put a dollar value to each option. This will be helpful when using options as a substitute for a salary. For example, rather than paying an employee a $100k salary, you could offer a $75k salary, in addition to $25k worth of options, that will vest over 3 years of employment at the Company. More cash left in your pocket, and more incentivisation for the employee.
“How could I ever keep track of when employees are meant to be granted shares? And how would I find time to do it?”
Cake can solve this issue for you. Once you’ve created your ESOP on Cake, it will automatically track time based vesting rules.
This way, once an employee’s options have vested (and can therefore be exercised to be issued shares in the Company), both the employee and the Company will get a notification. From here, they simply click a few buttons and the share issue is complete.
We have created the platform on a ‘set and forget’ basis, allowing you to focus on the growth of your Company, while the options incentivise in the background.
As part of your ESOP package, you will also get access to a simple dashboard for the Company to keep track of how many options have been issued, how many have vested, and how many are left to grant to future employees. Each employee will be provided an account where they can keep track of their options, without seeing any other confidential information of the Company.
ESOPs seem like a no brainer – Why doesn’t every start-up have one?
Start-ups will often talk about offering shares to early stage employees, and they will maybe even promise it, but often, they don’t make it happen. Why not? They think it is too complicated, too expensive and too time consuming.
Well, that was true. But now, Cake can help.
Cake offers template designed ESOPs, which can be individually altered to suit your specific needs – in minutes. Cake can assist in getting basic valuations, the sending of offers, electronic executions, and setting up automatic vesting rules in the platform. It’s all about setting and forgetting, and watching the benefits roll in.
Cake makes equity easy.
If you liked this article, check out What’s the difference between an ESS and an ESOP? or Early Bird Gets the Worm – 5 Reasons to Set Up Your ESOP Now
This blog is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.