An Employee Stock Option Plan (ESOP) is an excellent way of letting employees have a share in the company. This will help to give employees a sense of ownership to the company which they are working for. This is also a way to attract and retain talent. These are the main reasons for a company wanting to implement an ESOP.
While the reasons to implement an ESOP are plentiful, there are certain factors which companies must consider when implementing an ESOP.
Factor 1: What percentage of the total number of shares is to be set aside for the ESOP
There is no rule to limit this. However, there should be a limit placed on this number for obvious reasons. If the ultimate control is to vest in the original shareholders, there should not be a case where the shares to be issued to the employees should exceed a number such that the voting control starts to shift. It is common, in practice, to not have more than 10-15% of the total number of shares being set aside for the ESOP. Individuals are also usually limited to holding less than 5% of the total number of shares. While the intention is to encourage ownership, it would be prudent to retain the control in terms of voting rights to the initial shareholders.
Factor 2: ESOP will dilute shareholding. The level of dilution needs to be considered
The company may also be involved in fundraising activities where new shareholders come into the fray. This means that ESOP aside, the shares of the existing shareholders are already being diluted by the fundraising activities. An ESOP will further dilute the holdings of the existing shareholders. This level of dilution should be considered before embarking on an ESOP.
Factor 3: Dealing with shares that are held by employees who leave the company
This should be provided for in the ESOP agreement. There should not be a case where employees take a share of the company and then subsequently leave to join a competing company. The norm would be for the employee to surrender all his unvested options.
Factor 4: The setting up of the ESOP is not a simple task
It is complicated and should involve a deep discussion with a legal practitioner as well as the relevant professionals. There are many factors to be considered and it can be unique to individual companies.
When in doubt, seek legal advice or consult an experienced ACRA Filing Agent.
The editorial team at Singapore Secretary Services
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