NASSCOM EMERGE Community Catalyst for Growth of Emerging & Start-Up companies

Well. I think "Bonus" is another alternative that companies use to share success with their employees. Its pretty common in the US and its easier to implement as well because bonus is shared as per the employee grading.

Hi Umesh,

We are a startup as well and we have implemented an ESOP plan for all employees right from our inception. While we are still figuring out the legal stuff by having an ESOP plan in place, we were able to attract employees with the right mind-set. In fact in this age of 20-30% salary increments, I was able build a team that valued the ESOP more than the salary increments.

Most companies in silicon valley use ESOP as an alternate currency. The ESOP plan itself gets "cleaned-up" or formalized later but the # and value of the ESOPs and broad terms are decided upfront. The choice is pretty much upto you though there are restrictions in Indian law.

I have worked with ESOPDirect - a specialized team based at Pune in the past. You may like to check them out.

Good luck,

Arvind

Hi Umesh,

I checked with one of the consultants and some responses are mentioned below:

• At what stage company should go for ESOP

- There is no specific time, it's a function of how evolved is the business plan because the employees will need to be convinced about the value of the options they hold.

• How much of the total equity should be kept for ESOP.

- Again there is no law or best practice here. % of equity to be earmarked for ESOPs depends on level of existing capital, number of employees to be covered, growth potential and so on. Usually dilution in case of a start up is higher than in case of an established business.

• - Is there any standard formula about which team members get how much ESOP
- This is specific for every business. No standards or norms.

• - How much does it cost to formulate a ESOP plan
- Fees range depending on the Consulting firm

• Are there any good consultants who can help us to launch the ESOP plan
-One such firm that i can think of of is ESOP Consulting. their website address is www.esopdirect.com

Regards,

Avinash

Hi Sunita,

Thanx for your response. Ya, it can be a good idea to define a bonus which is a % of revenue / profit. In ESOP, teh benefit is that team members sacrfice the current monetory benefits and build the value for future, but that is effective only if team members value the ESOP and are willing to sacrifice the current money. Like Arvind seems to be lucky to find such people.

In our case, we are able to attract the best professionals from Semiconductor Industry, but at the market salaries. Even though we are paying market salaries, we will have to bind them somehow for long term, by alligning their long term interests. ESOP seems to be the best mechanism for that.

Regards,

Umesh

Hi Arvind,

Thanx for your response, it is good to get the guidance from a person who has first hand experience.

In general I see that in the ESOP scheme, companies define how many ESOP is given at what level.

Instead of having a general plan, can we have something like management can decide the number of ESOP on case to case basis. We are thinking to set the following rules for ESOP in our company.

- a person will get ESOP when he completes the 1 year in the company

- The number of ESOP to be given to him will depend on several factors like his performance in the first year, technical skills, industry experience, dedication, and other soft factors to be decided by HR.

- In one year if we think that our frequency is not matching with the candidate, and we are not the best company for him (and vice versa), then we may not give any ESOP to him. That will also be an indication to him, that he can find a better company for himself.

But I am not sure if it is feasible to have such a custom ESOP scheme.

Regards,

Umesh

Hi Avinash,

We will explore with ESOPDirect. However if you are aware of soem consultant in Delhi whoh can guide us, please connect us to him.

Regards,

Umesh

Hi Umesh

I am also of the opinion that ESOP should be implemented in the long term. However few points that are just coming are (1) companies do use combination of bonus as well ESOP (2) ESOPs are usually for mid-high grade employees (3) from employee's perspective "bonus" is instant money at the year-end while ESOPs do have some locking period (i.e. the emp cannot sell them before that) and also the value is fluctuating .. just to quote, take HDFC share which was approx. 1600 around May Mid but its now only approx. 900. So finally to say, that emp are not sure what kind of money ESOP will give them in their tenure with a company. (4) And believe me looking at the present stock market conditions, it would be really tough to convince employees for this. Finally what I perceive as an employee is that bonus brings instant benefits and ESOPs are for long term benefit. Combination will have much attraction to employees.

Hi Sunita,

I agree with you. However, there is a difference between the ESOP of established company ( like HDFC), and the startup company. For established company, the value of share certanly cannot grow 100 times, for startup company, if it succeed, the value of share can grow even several 1000 times. That brings the disproportionate growth / benefits to the ESOP holders if they conitnue with the company till IPO / acquisition etc..

For startups, it has nothing to do with stock market, if the value of ESOP for a startup does not grow, then believe me the company will not contnue to exist. If a person leaves a multinational company, and joins a startup, then he firmly believe that company is going to succeed.

Regards,

Umesh

So, our parent company is actually an LLC structure; incorporated in Delaware in the U.S., into ITES - with a wholly owned subsidiary in India. We want to give ESOPs to our employees (largely based in India and therefore employees of the Pvt. Ltd. company) in the LLC - does anyone know any way of doing this?

Initial advice has been that it is difficult to do, since tax unfriendly

Tx

Great Question from Sangita Joshi. We are in a similar boat (CA + Chennai) and would love to hear from people who have anything along these lines!