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1) Can you describe the three key steps towards designing an ESOP plan for the first time?

The first important step is to define the objective of implementing an ESOP plan in your company - do you want it as a reward tool or a retention tool or to encourage employee ownership? You may have one or more of these objectives. The scheme design will depend on what you want to achieve with an ESOP plan. The second step is to take some key decisions such as how much do you want to dilute and at what price, whom do you want to cover, what benefits you would want the employees to receive and so on. The third step is designing the other scheme parameters such as vesting terms, separation rules, exercise period etc.


2) How do I balance the interests of my employees and investors while creating an ESOP plan? Do their interests converge or diverge?

This is a key issue that has to be addressed. The employees and investors are the key stakeholders in the ESOP implementation process and the whole objective of implementing ESOPs is to ensure that the interests of the stakeholders converge. The idea is to ensure that the business valuation grows, to get employees to think like investors so that they focus on the bigger picture - beyond just their own work or their team’s or division’s work. The only area where their interests could diverge is when it comes to pricing - should the employees pay the fair market value for the shares or should they get them at a discount? There is a fine balance and normally the decision goes in favour of the investors. It’s the norm to issue options at market price. However, this can be balanced by issuing fewer shares (less dilution for the investors) at a discounted price (more gain per share and lower risk for the employees).


3) How do I ensure financing for my stock options? What kind of organisations can I approach to help me?

Most of the banks provide financing for exercise of options. Your employer will have to be approved by the bankers since they are taking a call on the shares of your employer. There are some NBFCs as well who can help.


4) Are ESOPs a zero-cost means of sharing the wealth generated by my firm? If not, what are the costs that I should be concerned about?

There is no free lunch. ESOPs are not cost free. If you are an entrepreneur wanting to grant ESOPs to your employees, you should worry about the dilution in the value of your shares that would result from the issue of ESOPs. In a listed company, ESOPs are cash flow neutral since the market pays for the gains of the employee and there is no cash flow from the company. This is often confused as zero cost.