Do you speak ESOP? Don't worry, here is the dictionary.
ESOP features are like a foreign language: Without understanding it, you can make the wrong decisions with far-reaching consequences.
Within ESOP features like the number of stock options or more generally instruments granted to eligible employees are specified. These options/ instruments give employees the right to purchase company shares at a predetermined exercise price or a corresponding cash payment.
The ESOP feature exercise price (also known as the strike price) sets the price at which employees can buy company shares when they exercise their options. This price is typically set at or above the current market price of the company’s stock on the date of grant.
ESOP feature: Vesting schedule
ESOP feature often include a vesting schedule that determines when employees become eligible to exercise their options. Vesting can be time-based (e.g., over a number of years) or performance-based (e.g., tied to achieving specific goals or milestones). Vesting encourages employees to stay with the company to realize the full benefit of their options.
For more detailled information about vesting conditions, please visit our vesting conditions website within the knowledge center.
Each option grant comes with an expiration date, after which the options become worthless if not exercised. This date is set in the ESOP feature and typically ranges from a few years to a decade or more after the grant date.
The ESOP outlines the period during which employees can exercise their options. This period often extends beyond the vesting period to give employees flexibility in choosing when to exercise.
Employees can exercise their options to purchase company shares according to the terms of the ESOP. The purchase of shares often requires employees to pay the exercise price in cash or use a cashless exercise method (if allowed by the plan).
Condition to buy shares
ESOP feature: Dividends
Some ESOPs may provide for the payment of dividends to option holders. These dividends can be paid either in cash or in additional option shares. Alternatively, dividends may be accrued and paid out upon the exercise of options.
ESOPs may include provisions related to a change of control event, such as a merger, acquisition, or sale of the company. These provisions may accelerate vesting or make options immediately exercisable in the event of a change of control, ensuring that employees can benefit from the change in company ownership.
Change of Control provisions
The plan specifies which employees are eligible to participate. This can include full-time employees, part-time employees, executives, and sometimes even contractors, although eligibility criteria can vary.
ESOPs often include restrictions on the transfer or sale of options to third parties. This helps maintain the alignment of employee interests with the company’s objectives.
Transfer restrictions within ESOP feature
Clawback provisions within ESOP feature
Some ESOPs include clawback provisions that allow the company to recover gains from exercised options under certain circumstances, such as financial restatements due to misconduct.
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