The ESOP is an option programme which consists in offering key employees the opportunity to become co-owners of the company. Participants in such a program gain the right to participate in the distribution of profits which the company will develop, which is a good motivation for effective work. More importantly, the ESPP can be offered to any employee/coworker (the form of employment or the type of contract is irrelevant).
The main benefits of implementing the option programme are:
- Motivation and retention of key employees of the company;
- Award the best and most committed/profitable employees;
- A clear and transparent optional system that may be linked to the work experience and position;
- link the company's interests with the interests of employees;
Cliff and period of acquisition of allowances
Option schemes shall contain a description of the mechanisms governing when, how and in what form the employee will receive a parcel of shares or shares. In the end, only part of your ESOP will be handed over to employees. This is due to the fact that your ESPP should have a clearly designated cliff and a period of entitlement. Some of your employees will leave the company before reaching another cliff. Then they will lose their unused options too.
Simply put, the period of entitlement is the time the employee has to work at the company to receive all the options he deserves. The market practice is that, at the Seed and Round A stage, the period of acquisition of allowances is usually four years, since the company's highest value is usually created during that time.
In addition to the length of the period of entitlement acquisition, it is also necessary to specify the frequency with which the worker acquires options, so-called cliffs. The most popular models establish monthly or annual settlement periods.
Safeguarding the company from bad faith participants in the ESPP
The basic element that protects the company from disloyal employees is the prohibition on divesting shares/shares covered by the ESPO or the possibility of divesting shares/shares only under specific conditions. An additional security is the so-called coercion to sell, which is a clause that guarantees that if the majority partners find an investor interested in purchasing all existing shares/shares, participants will not be able to refuse to sell their ESPO shares/shares.
To be remembered when implementing the ESOP
First of all, it is important to determine how many shares/shares we want to allocate to the ESPP. The most common solution is the adoption of the ESPP pool at the level 10-20% all existing shares/shares. The next step is to determine who and how many shares will receive. It is worth dividing employees into several levels, e.g. a key employee of the company (management members, operational partners), senior employees (vice directors, directors), middle-level employees (e.g. managers) and everyone else.
It is also worth taking into account the promotion of individual employees during the period of the ESOP and the possibility to receive additional shares/shares after the implementation of specific key performance indicators – NIPs.
Author: Bartosz Nawrot, legal consultant, associated with Russell Bedford Poland law firm from 2018.