“We are pleased to inform you that [Company Name] (the "Company") has granted you an employee stock option as part of our Employee Stock Option Plan (ESOP). This option is a symbol of our appreciation for your contributions to the company and a means to align your interests with those of our shareholders.”
If you’re reading this article, it means you might be receiving an ESOP grant letter, or you might have received it (some part of which sounds like the above text).
Given the amount of “legalese” in the letter, most people would not understand what is being offered to them. Let’s resolve that today. Let’s decode the ESOP Grant letter and identify the relevant parts that will help you understand what’s in it for you.
Key Terms in the Grant Letter You Should Understand
- Stock Options Allotted: This is the number of stock options you've been granted, and their type of ISO, NSO, Phantom Stock, etc.
- Strike Price: The price at which you have the right to acquire the shares at the time of exercise. The lower the strike price, the less expensive it is for you to acquire the shares when you exercise your options.
- Grant Date: The grant date is when the options were officially awarded to you. It's important because it determines the starting point for vesting and calculating the option's value.
- Face Value: Sometimes referred to as the grant price, this is the initial value assigned to each option.
- Valuation at Grant date: This refers to the valuation of the company's shares at the time of the grant. It's essential to know this value as it affects the potential future value of your options.
- Vesting Schedule: This outlines when and how your options become exercisable. You’ll need to check the vesting start date, the cliff period, and the vesting period. Common vesting schedules include monthly, quarterly, or annually over several years.
- Exercise Period: Understand when and how you can exercise your options. Once the options are vested there will be a time period when you can exercise them, you’ll need to ensure that you are aware of this.
- Exercise Period in Case of Termination/Death/Disability: Check whether your options remain exercisable under different scenarios, such as if you leave the company (voluntarily or involuntarily), in the event of your death, or if you become disabled.
- Resale Restrictions: These restrictions might limit your ability to sell the shares obtained through exercising your options. Common restrictions include a lock-up period after an IPO or pre-IPO restrictions. Understand when you can sell your shares and any associated conditions.
- Tax Implications: Understand the tax implications of exercising your options. This sometimes might be explicitly mentioned other than the fact that you would have to pay the relevant tax. Gaining an understanding of this will help in the future.
- Company Policies: Your grant letter might refer to the company's stock option plan or other policies. Ensure you have access to these documents and review them to understand your rights and obligations. Ask your HR in case there is any other documentation needed.
- Change of Control Provisions: Check if there are any provisions related to what happens to your options in case of a merger, acquisition, or other significant corporate events.
- Acceptance: Though it sounds basic, you’ll have to sign and give back the grant letter on time to ensure you’re showing an acceptance.
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Sample Grant letter
[ Values and dates taken are for reference. Actual policies would wary company to company. This is not exhaustive but contains a part of what details would be included in an ESOP Grant letter]
We are delighted to inform you that XYZ Corp. (the "Company") has awarded you an employee stock option grant under our Employee Stock Option Plan (ESOP). This grant reflects our appreciation for your contributions to the company and our commitment to align your interests with those of our shareholders.
- Grant Date: April 15, 2023
- Number of Options Granted: 1,600 shares
- Exercise Price per Share: $0
- Type of Option: Incentive Stock Option
- Cliff Period: 1 year
- Vesting Schedule: 25% over 4 years annual vesting
April 15, 2024 (1-year cliff):
- 25% of the total options granted vest on this date.
- Total vested options: 400 shares
- Unvested options: 1,200 shares
April 15, 2025
- An additional 25% of the total votes (400 shares) vest.
- Total vested options: 400 shares + 400 shares = 800 shares
- Unvested options: 800 shares
April 15, 2026
- Another 25% of the total options (400 shares) vest.
- Total vested options: 800 shares + 400 shares = 1,200 shares
- Unvested options: 400 shares
April 15, 2027 (Annual Vesting)
- An additional 25% of the total options (400 shares) vest.
- Total vested options: 1,200 shares + 400 shares = 1,600 shares
- All options are now vested.
Expiration Date: April 15, 2033
Exercise Period in Case of Termination/Death/Disability: In the event of your termination, death, or disability, the treatment of your options will be in accordance with our company's ESOP and policies in effect at that time. Please refer to those documents for specific details.
By accepting this grant, you acknowledge that you have read, understood, and agreed to the terms and conditions outlined in this letter and the ESOP. Please sign and return one copy of this letter to XYZ Corp. (the "Company") to signify your acceptance.
Special note: For those employees who have received ESOPs in your job offer
If you are a new employee or someone who is negotiating their salary and ESOPs have come up as a part of your compensation, then ask these questions to your potential employer.
- Ask for their ESOP plan documentation
- Don’t accept anything till the ESOP grant letter is given with all the actual grant and exercise dates, The offer letter doesn’t signify ESOP allotment only the grant letter does.
- Ask who is liable to pay tax on stock options- The company or employee?
- Ask the rate at which the company has grown since incorporation or at least the past few years.
Please note: Consult a financial advisor for more detailed information
How can Vega Equity Help Your Employees Understand all These Easily?
With Vega, you can help your employees see and understand all the information they need to manage their ESOPs right from accepting the grant letter to checking their vesting schedules and understanding their wealth gain all under one view. Contact our experts to know more.
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