An overview on ESOP and ESOW for startups

Feb 02

An overview on ESOP and ESOW for startups

When you conceptualise your business idea and start a company, the next big task is to hire the right people to join you in your start-up journey. Thus, you employ the best talent to help you grow your business. It is only apt that you reward your employees in their journey with your growing business. Apart from the monthly renumeration (salary), what else can you do to make a difference to your employees? How do you get them to feel that they are an integral part of the company and also motivate them to continue growing the company?

Solution: Make them a part of the company. Here’s how!

Employee Share Option (ESOP)

futurebooks switch on An ESOP scheme is a form of gratuity paid by an employer to its employees for their continued service in the company. It is a form of incentive for the employees.

futurebooks switch on An ESOP gives an option (right) to the eligible employees of the company to buy shares in it and become part owners (shareholders). A scheme is usually spread over a vesting period of 3-5 years.

futurebooks switch on In Singapore, employees are taxed on the date on which the ESOP is exercised.

Employee Share Ownership (ESOW)

futurebooks switch on An ESOW scheme is another form of gratuity adopted by an employer to reward its employees. This type of scheme is an alternate to ESOP.

futurebooks switch on In an ESOW scheme, the shares are directly allotted to the employees. The company can either choose for the ESOW scheme to have a vesting period or issue shares immediately to the employees. That is to say, once an ESOW is rewarded to the employees, they become the part owners (shareholders) of the company straight away.

futurebooks switch on In Singapore, under an ESOW, employees are taxed on the date on which the ESOW is granted.
 

Benefits of ESOP and ESOW

 
Retainership instrument
Employee share incentive schemes can be treated as a retainership instrument for small businesses as there is a lock in period for exercising the right to purchase the shares or alloting the shares directly. Thus, this option can help businesses retain its employees.

Onwership feeling for employees
Getting shares in the company in which they are working in gives employees a feeling of ownership within the company. Additionally, the employees get to share the profits of the company in the form of dividends.

Option in lieu of salary
Businesses that need funds and are not in a position to spend hefty salaries can offer these options, ESOP or ESOW, to their employees in lieu of salary. This can be a good way to motivate your employees.
 

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Tips for startups implementing employee share incentive schemes

 
The following questions can help the company decide on the right employee incentive scheme for its employees:

What is the intention in rewarding the employees?

When does the company intend to reward its employees? That is, will the employees get an immediate reward or will the reward (the shares of the company) be spread over a few years?

Is the company expecting a fund investment in the near future?

If yes, then will it be beneficial to create an ESOP pool (which will be reflected in the cap table) so the investors can understand their ultimate diluted shareholding?

How complex will the ESOP or ESOW be?

If it is more complex, consider the cost of maintaining the ESOP trust (if required).
 
Futurebooks’ corporate administration services help growing companies in administering and managing their ESOPs and ESOWs requirements. Feel free to reach out to us today!

 

Need a hand in rewarding your employees with ESOP? Contact us.

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