How to grant ESOPs to your employees?

In the previous blog post of our ESOP101 series, we explored how to structure an employee equity pool in India, breaking down the key elements involved in creating the pool to distribute equity options. In this edition, we’ll guide you through the steps of granting ESOPs to your employees.

Before an ESOP grant can be issued, a company must establish an ESOP scheme, which is a formal plan outlining how equity compensation will be structured. This scheme includes the eligibility criteria, vesting schedules, and allocation methods for distributing stock options. 

The ESOP scheme ensures consistency and transparency in how employees qualify for and receive stock options, forming the foundation upon which individual grants are made. The scheme also covers essential provisions like exercise conditions, restrictions, and tax implications. Once

What is an ESOP grant?

An ESOP grant is issued when a company offers stock options to eligible employees, giving them the opportunity to purchase company shares at a discounted price (known as the strike/exercise price) after fulfilling a specified period of service, called the vesting period. 

The vesting period often includes a cliff period, which is the initial time frame (usually 1 year) during which no options vest. After the cliff is reached, a portion of the options vest, and the remaining options typically vest gradually over time.

Before receiving these options, employees are required to sign a Grant Letter, which formalizes the offer and solidifies the agreement between the company and the employee.

What is a grant letter?

A Grant Letter is a legally binding document that outlines the specifics of the ESOP offer. 

It details important elements such as the number of stock options being granted, the vesting schedule, and any associated conditions. 

This letter ensures that both; the company and the employee clearly understand the terms of the equity compensation. 

It is typically signed by an authorized company representative, such as a director, C-suite executive, or a member of the board and the employee.

ESOP grant letter template and components

See the full example grant letter template here.

An ESOP Grant Letter should include the following elements to ensure transparency and legal clarity:

1. Company information

Include the company’s legal name, address, and any relevant corporate details. This ensures both parties know the official entity offering the stock options.

‍2. Employee details

Clearly specify the employee’s full name, job title, and unique identifiers (such as employee ID) to avoid any confusion.

3. Grant specifics

- Define the number of stock options being granted or the percentage of ownership allocated.

- Mention the type of stock options (e.g., ISO or NSO if applicable) for tax and legal clarity.

- Also specify the ESOP plan for the particular grant, in case the company has multiple ESOP plans.

‍4. Eligibility criteria

State the requirements for the employee to be eligible for the ESOP grant, such as employment status, role, or tenure.

‍5. Vesting schedule

- Provide a breakdown of the vesting schedule, including the cliff period, and how stock options will vest over time.

- Include any milestone-based or performance-related vesting conditions.

6. Exercise price

Specify the strike/exercise price.

7. Exercise window

Specify the time frame during which employees can exercise their stock options both while they remain employed, once the options have vested, and after they leave the company. Include any limitations or conditions for exercising options in both scenarios.

‍8. Cliff and vesting periods

‍- Cliff period: Define if there is a cliff (e.g., a 12-month period during which no options vest).

- Vesting period: Clarify how stock options vest after the cliff period (e.g., monthly, quarterly, or yearly).

9. Restrictions and conditions

Clarify any restrictions tied to the stock options, such as:

- Vesting conditions

- Performance-based triggers

10. Termination and exit scenarios

- Clearly outline what happens to unvested or vested options in the event of employment termination, whether voluntary or involuntary.

- Mention the right of first refusal, buyback options, or other provisions that define the company’s rights if the employee leaves.

- In case of employee death or disability, state any special clauses or terms.

It’s not mandatory to mention this in the grant since the ESOP Scheme document usually covers all of these details, but you can affix the scheme document with the grant while sharing it with your employees

11. Confidentiality and non-disclosure

Include clauses that bind the employee to maintain confidentiality, particularly concerning sensitive company information or proprietary data.

‍12. Change of control provisions

If relevant, mention any clauses that explain what happens to the employee’s options in the event of a merger, acquisition, or similar corporate restructuring.

‍13. Other legal and compliance terms

Include any other legal provisions like dispute resolution, governing law, or jurisdiction that applies to the Grant Letter.

ESOP grant letter issuance via EquityList

The process of issuing grants to hundreds of employees is often complex and prone to errors. 

Many companies rely on manually drafting multiple grant letters, which increases the risk of mistakes and inefficiencies. Additionally, issuing grants is a coordinated effort involving multiple stakeholders, making it a time-consuming task.

To streamline this, companies are encouraged to use equity management platforms like EquityList, which automate and simplify the entire process, reducing errors and saving time.

EquityList is a comprehensive equity management platform that allows companies to issue hundreds of grants in just a few clicks—a process that would otherwise take days or even weeks if done manually.

Explore EquityList for stock options management.

Benefits of grants via EquityList

- Easily bulk upload employee grant details, including various ESOP plans, vesting schedules, and past vesting history.

- Select multiple employees to issue grant letters at once.

- Customize grant letters to align with the company’s branding.

- Seamlessly collect electronic signatures from both authorized signatories and employees.

The platform also allows you to track the entire ESOP process, from grant issuance to option exercises, offering a smoother, more transparent experience for both companies and employees.

If you have more questions, feel free to contact us at help@equitylist.co. Stay tuned for the next blog!