FAQ
Employee Stock Option Program

Read this FAQ about the advantages of having an employee stock option pool or ESOP and how many shares it should contain.

ESOP

What is an ESOP?

ESOP or Employee Stock Option Plan is a type of compensation that startups use to offer their employees, advisors, and board members stocks instead of cash. This program can either be used to prolong the runway by offering lower salaries than a “normal” job or as a bonus.

 

To implement an ESOP program, an agreement must be created in the market where the startup is located. However, the program should also be offered under the local rules of the employee’s location. It’s important to note that there may be tax-related issues depending on the market. Therefore, it’s advisable to consult a local tax advisor for more information.

When it comes to determining the size of an employee stock option plan (ESOP), the general rule of thumb is to allocate approximately 10% of the company’s total pool of shares. An ESOP is a compensation plan that startups use to offer their employees, advisors, and board members stocks instead of cash. This program can be used to prolong the runway by offering lower salaries than a “normal” job or as a bonus.

If you’re granted stock options, it means that you have the right to earn a specific amount of stock options over a predetermined period called the vesting period. Stock options are a form of compensation that startups use to attract and retain talent by providing employees, advisors, and board members with the opportunity to own a piece of the company.

In most cases, the board of directors is responsible for approving stock option grants in a board meeting. The board must review the company’s compensation plan and approve the grant in a board meeting.

ESOP or Employee Stock Option Plan is a type of compensation that startups use to offer their employees, advisors, and board members stocks instead of cash. This program can either be used to prolong the runway by offering lower salaries than a “normal” job or as a bonus.

 

To implement an ESOP program, an agreement must be created in the market where the startup is located. However, the program should also be offered under the local rules of the employee’s location. It’s important to note that there may be tax-related issues depending on the market. Therefore, it’s advisable to consult a local tax advisor for more information.

A typical stock option program includes a one-year cliff, which means that an employee or advisor will only earn the granted stock options if they remain with the company for at least one year. This is especially relevant for programs with a monthly vesting schedule.

ESOP or Employee Stock Option Plan is a type of compensation that startups use to offer their employees, advisors, and board members stocks instead of cash. This program can either be used to prolong the runway by offering lower salaries than a “normal” job or as a bonus.

 

To implement an ESOP program, an agreement must be created in the market where the startup is located. However, the program should also be offered under the local rules of the employee’s location. It’s important to note that there may be tax-related issues depending on the market. Therefore, it’s advisable to consult a local tax advisor for more information.

When an employee leaves the company before the vesting period is complete, the “good or bad leaver” clause comes into play. If the employee resigns in good standing, they can usually retain the vested stock options thanks to the “good leaver” clause. However, if the employee is considered a “bad leaver” due to disloyalty or other negative circumstances, they may lose all of their vested stock options, as well as any unvested options. It’s important to carefully review the terms of your stock option agreement to understand the potential consequences of leaving the company.

The exercise price is the amount an employee must pay to convert their stock options into actual shares. This price can vary based on factors such as the funding round during which the options were granted, the employee’s location, and the country where the startup is registered. While companies have flexibility in setting exercise prices, it’s important to consider potential tax implications in the future.

The timeframe for exercising stock options varies depending on the program. It could be at the time of the company’s exit within a specific period, or it might be possible after the options have been vested for a certain duration. The typical exercise timeframe ranges from 5 to 10 years. It’s important to understand the specific terms of the stock option program to know when and how to exercise the options.

When employees leave a company early, it may be beneficial for the company to buy back their stock options. This can be done by paying the exercise price or, in some cases, with an added interest rate. The option to buy back stock options can provide flexibility for the company, but should be carefully considered and negotiated as part of the overall stock option plan. This is however only the case if the employee is a good leaver and can keep the stock options. If they lapse due to the employee being a “bad” leaver then there is nothing to worry about for the company.

Reverse vesting of real shares can be a viable option for newly established companies where the value is relatively low. It involves granting new founders real shares instead of stock options, and they earn ownership through a low salary and hard work. For instance, a CTO who contributed to building the product before the company launch could benefit from this arrangement. They won’t be required to invest capital in the company but can still have a fair stake in the business. If they decide to leave early the shares can float back into the company.

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