Things to Know Before Accepting Your ESOP Grant Letter

  • Written Written by Manish Panwar 27 May 2024 | 4 min read
  • Editor's Note :

    As an employee, remember the time or the moment when we first heard or saw the ESOP Grant Letter. There were N number of doubts/queries that came up in our mind. So before even understanding the actual benefits/advantages of the ESOPs we must understand certain specific terms from the grant letter and how to decode the clauses mentioned therein. To resolve all these, we conducted a Webinar on 15th February 2024 at 03:00 PM in which around 55 different attendees were there from different sectors and corners.

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Introduction

Ready to ditch the grant letter confusion? Whether you’re new to ESOPs or a seasoned professional, this webinar will help you revolutionize your ESOP journey! In this webinar, we tried to solve the numerous doubts that come to the mind of an employee when he/she first listens to or comes across the word ESOPs and directly lands into a world of illusions by confusing whether it is a RIGHT or an OBLIGATION to us as an employee.

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Key Highlights

The Webinar was conducted for the Stakeholders to

Summary of the Webinar

The webinar started with an introduction of our speaker Mr Manish Panwar who is a Chartered Accountant by profession and has more than 8 years of experience in this field having worked with multiple early & late-stage startups he has gained deep insights and knowledge on this subject.

You Can Watch the Full Video Here:

There were 4 specific areas on which we focussed to cover from employee point of view: -

1. Just starting with ESOPs? What should you be aware of?

2. How to read your ESOP grant letters?

Understanding the different nuances of your Grant Letter like the quantity of options granted, fair market value at the time of grant, ESOP Value, FMV to EP Ratio, Exercising & Vesting terms, etc.

3. Are ESOPs right for you? Evaluating the potential payoff

  1. Early Stage (Seed/Series A): Higher risk, higher potential reward: The company has a potential for significant growth which can lead to large pay-outs if the company succeeds. However, there's also a higher chance of failure, resulting in worthless options.

  2. Later Stage (Series B+): Lower risk, potentially lower reward: The company has some proven traction and valuation, but the profits might be limited compared to early-stage opportunities. Still, the chances of success are higher, offering greater security.

4. What are the taxation implications of ESOPs?

The 2 stages of ESOP taxation are explained below: -

A. Stage 1: At the time of exercise:

Suppose you have 100 ESOPs at an Exercise Price of Rs. 10 and the FMV at the time of exercise is Rs 100

Perquisite Income: (FMV - Exercise Price) X No. of ESOPs Exercised = (100-10) x 100 = Rs. 90,000/-

This amount would be now taxed as per the income bracket of the individual.

B. Stage 2: At the time of Sale of Shares:

Suppose you have 100 exercised ESOPs at a Selling Price of Rs. 200 and the FMV at the time of exercise is Rs. 100

Capital gains tax: (Selling Price - FMV) X No of ESOPs Exercised X Tax Rate = (200- 100) x 100 = Rs. 10,000/

This amount would be treated as Capital Gains and taxed based on whether it is short-term or long-term.

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Vega Equity Tips

Ask these Questions

  1. What happens when an employee quits or is terminated?
  2. Are there any restrictions on the number of shares that can be exercised, and is there a lock-in period for selling shares?
  3. When does the cliff period start?
  4. What type of options are you receiving?

Audience Engagement

Out of the total 78 registrations we had 55 attendees and till the full webinar was completed (almost an hour) we had 92% stickiness to the webinar ~ 50 attendees were available till it last with numerous interactions, questions & doubts on various parameters around the ESOPs.

Key Takeaways

Key takeaways from the webinar underscored the critical role of ESOP Grant Letters in outlining terms and conditions, fostering employee participation, and enhancing retention within organizations. By delving into topics such as cashless exercise, ESOP funding solutions, and regulatory considerations, the webinar provided a comprehensive understanding of how companies can leverage innovative approaches to maximize the benefits of ESOP schemes.

The webinar underscored the critical need for effective communication, education, and compliance in implementing ESOP Grant Letters. By tackling financial obstacles, offering flexibility, and nurturing a culture of ownership, companies can cultivate an environment where employees can fully leverage the benefits of their stock options.

Conclusion

Enhancing Understanding and Implementation of ESOP Grant Letters

This webinar on ESOP Grant Letters served as a pivotal platform for enlightening participants on the intricacies and significance of Employee Stock Option Plans. Through insightful discussions and practical examples, the webinar aimed to demystify the complexities surrounding ESOP Grant Letters and empower attendees with the knowledge needed to navigate this essential aspect of equity compensation planning.

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