ESOP features
ESOP features are like a foreign language: Without understanding it, you can make the wrong decisions with far-reaching consequences.
ESOP grants
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.
Exercise price
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 detailed information about vesting conditions, please visit our
article on vesting conditions
within the knowledge center.
Expiration date
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.
Exercise period
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.
Condition to buy shares
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).
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.
Change of Control provisions
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.
Employee eligibility
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.
Transfer restrictions within ESOP feature
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.
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.