December 17, 2020 Last updated December 17th, 2020 833 Reads share

How To Set Up An Employee Share Option Plan

Image Credit: DepositPhotos

In today’s business world, the process of attracting and retaining good employees can be very challenging for your company. With the advent of modern innovations, which make work much easier and faster, you create a new generation of employees who demand more from your organization, not just in terms of benefits, but in terms of alignment of goals and values as well. This is when an employee share option becomes essential.

If you consider having an employee share option plan in your company, keep reading this article to learn everything about it and how to set it up efficiently.

What Is An Employee Share Option Plan?

In simple terms, an employee share option plan (ESOP) refers to an equity compensation plan offered and granted by companies and corporations to certain employees and executives. Instead of giving them shares of stocks directly, the company \provides options that an employee can freely exercise. These share options can include, but not limited to, regular call options and giving the employee the right to purchase the company’s stocks at a specific price for a definite period of time.

Typically, the terms and conditions of most ESOPs are laid down to an employee in an employee share option agreement or contract. On the other hand, the following are a few benefits of having an employee share option plan for your employees and your business:

  • Encourages Employee Involvement – Since your employees play an essential role in your business’s success, be sure they don’t feel like a cog in a machine. To do this, setting up an employee share option plan can be an excellent idea to promote employee involvement. It ensures that they have a better sense of ownership, which, in turn, can drive profitability and productivity.
  • Helps Generate Liquidity While Maintaining Control – As a business owner, you need to generate liquidity to keep the company afloat. But, if you’re concerned about making your business liquid without losing operating control, having an employee share option plan can be a perfect idea. With ESOP, you have the option to sell a minority interest, which can generate the liquidity required while you keep the control in your hands. And to help you determine and manage who gets what in your organization while focusing on running the operations, the professionals operating the equity platform, such as Cake, can assist you more efficiently.
  • Improves Recruitment and Retention – With an ESOP, your employees will have an ownership interest in the company. As such, they’ll be encouraged to stay longer until they retire. This is one of the reasons why it can boost your company’s recruitment and retention rates.

Tips For Setting Up An Employee Share Option Plan

Now that you know what an ESOP is and how sharing business ownership with employees work, it’s time to get familiar with how you can set it up for your business and employees. To get started, below are a few tips to consider from the get-go:

Develop Your Philosophy About Your Employee Share Option Plan

The first step in the process of setting up an employee share option plan (ESOP) is to come up with your company’s philosophy around the mentioned plan. This means you should lay down the ideologies or principles behind the plan you’re going to set up.

To do this, you should conduct a collaborative discussion among your advisors, the board of directors, and founders. This will allow you to gather some ideas or recommendations as to how you’re going to successfully establish your ESOP for the benefit of your business and employees.

Also, by consulting these people, you’ll figure out the primary reasons why you’re doing this and what benefits your company will gain from this method. Not only that, but you’ll also be able to discuss the steps on how you can communicate the share plan to your future employees, as well as how to consider your company’s mission and values in creating your plan’s design.

Determine How Much Of Your Company Stocks To Share

By now, you already have put the philosophy of your ESOP in place for the implementation stage. At this point, you need to figure out how much of your company stocks you’re planning to share with your existing and future employees. While most regular stock grants are being sold in shares of 100, you may choose some ways on how to allocate them differently, depending on the financial circumstances of your company.

In doing this, it’s best to get the advice or suggestions of your advisors and the board of directors to make a better decision about this. They may know the right amount of stocks your company should allocate for your employee share option plan while ensuring the balance between cash and equity compensation.

Formalize The Employee Share Option Plan

The final step in the process is formalizing your company’s ESOP. However, in doing this, you may have to consider plenty of factors before you can successfully set up one for your business. For instance, you need to put the plan into writing and seek the approval of the board of directors and your stockholders. Without their approval, you may not be able to implement the plan for your existing employees and those who will join in your organization later on.

Moreover, it’s also essential to consult your company lawyers to make sure you have the required state permits when complying with federal and state regulations. Since various states have different regulations concerning ESOPs, you should never hesitate to work with a lawyer to know if you’re following the correct set of regulations. By doing this, you can ensure the successful implementation of your share option plan going forward.

Bottom Line

When it comes to driving productivity and aiding employee retention, setting up an employee share option plan (ESOP) can be one effective option. It can be an excellent way of showing everyone that you take every aspect of your business seriously and that you value your employees, as well as your stockholders.

Therefore, if you’re planning to set up your employee share option plan anytime soon, keep the information mentioned above in mind and you’re good to go.

ESOP or employee stock option program blocks -DepositPhotos

Irene N

Irene N

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