EMPLOYEE SHARE PLANS OR MOTIVATING THE BEST

OVERVIEW

For decades now companies have been rolling out programs to motivate and retain their most important capital; the employees (if you as an employer haven’t understood this yet, then you may be in trouble). One of the contemporary tools used by companies is ESOP, also known as Employee Stock Option Plan or Employee Stock Ownership Plan. Is there a difference between these two? Yes, there is a slight difference, but before we dig into that let’s quickly discuss the importance of giving employees a slice of equity in a company’s business.   

SHARING IS CARING

By offering and an ESO plan, employers usually manage to:

1. Have employees work for results and value creation;
2. Mitigate the brain drain towards competitors;
3. Keep the talent at home and not lose those beautiful minds to foreign markets;
4. Motivate those in rank and file to climb the ladder;
5. Keep the cash in business.

ESOP vs ESOP

Now, what is the difference between and (1) Employee Stock Option Plan and an (2) Employee Stock Ownership Plan?

The first one is basically a program that gives the employees the option, but not the obligation to buy a certain number of shares, usually at a below market price (either predetermined or discounted price). These programs usually work best when the company’s shares are publicly listed, so the employee can follow the market and price hikes (makes sense) and when believes that the price is right, can exercise the option and buy the shares at a beneficial price (strike price). This method is widely used in the United States, or countries where the stock markets are vibrant.

The second plan is usually used by privately held companies or in economies that do not have mature stock markets. Under this plan the employer will give employees a slice of the business in the form of shares or stocks either free of charge or at a discounted price (below book value or market value), if and when they meet certain criteria.     

ARMENIAN CASE

Some companies in Armenia have started implementing ESOPs or thinking about doing so in the near future. The reason for this is because positive shifts in business thinking, exposure to modern approaches, increase in staff skill levels, accrued capital over the past 30 years due to employee loyalty, brain-drain in certain sectors.

Armenian companies can implement ESO plans irrespective of being a:

1. Limited liability company vs. joint stock company;
2. Publicly held vs. privately owned;
3. Established vs. emerging business;
4. People based vs. asset based;
5. High skilled labor oriented vs. low skilled oriented;
6. Import oriented vs. export oriented;
7. Large staff vs. small staff.

Actually, ESO plans might work for anyone that has the determination to motivate and retain the best in the market by sharing the pie.        

HOMEWORK

To roll out an ESOP plan the employer must do some prior planning and homework to make sure that the plan is tailor-made for the specific organization and the initiative actually motivates the staff. We believe the homework should be done in 10 areas, particularly:

1. Eligible employees – Who is eligible for the plan
2. Key performance indicators or KPIs- are there any? How is performance measured?
3. Share vesting process and requirements – How and when will the employees receive (vest) the shares
4. Pricing – How should the employees shares/options be priced?
5. Right to sell/donate after share vesting – Can the employee sell/donate her shares after vesting?
6. Leaving the company – What happens with the vested shares when the employee leaves the company?
7. Firing/laying-off/transfer – Sometimes employees with vested shares may be fired, laid-off or transferred to a sister or subsidiary company. What happens with the shares?
8. Spousal relationship – Will the spouse of the employee have a slice of the share (50% under Armenian law if vested after marriage)?
9. Inheritance – How will these share be inherited by the employees? 
10.  Minority rights - Do the employees have minority right and if yes, what would those be?

Here at TK & Partners we have designed 85 questions that we go through with our clients to discover the intentions, goals, process, and limitations of a new ESOP plan. After careful discovery of the above-mentioned areas we both design the policies and procedures of the program and the legal instruments (agreements) that make the program work and protect both parties (employer and employee).

HOW CAN WE HELP?

Our team has extensive experience in helping both true startups and mature companies set up programs that either introduce share options or some other form of employee equity participation. So please, do get in touch when you want to get sophisticated advice.