Employee stock option plan (ESOP) is to set aside some shares in advance to motivate employees (including founders, executives, backbone and ordinary employees). The implementation of equity incentive plan is the most common form of start-ups, which is considered to be one of the necessary key factors to promote the development of start-ups in Europe and America.
Options are different from equity, which represents ownership, while options represent the right to buy specific ownership at a specific time and at a specific price. It can be regarded as a contract between employees and the company about the sale of shares.
After the exercise, the shares obtained by the employees are common shares.
Second, the purpose of the option plan:
1) Attract high-level talents when you can't pay a high salary at the beginning of your business;
2) compensation for entrepreneurial risk of management and backbone;
3) Give employees a sense of belonging, so that the interests of employees and shareholders are consistent;
4) Solve the long-term incentive problem and retain talents.
Third, the establishment and scale of option pool:
The practice of Silicon Valley is to reserve 65,438+00%-20% of the company's total shares as option pool. A bigger option pool is more attractive to employees and VC.
Generally, the board of directors decides which employees to issue, how many options to issue and the exercise price within the limit set by option pool; There is also a direct authorization to the management.
VC generally requires the establishment of option pool before entry and a certain proportion after entry (see the above agreement).
Because each round of financing will dilute the equity ratio of option pool, it is usually necessary to adjust (expand) option pool every time of financing to attract new talents.
Fourth, the principle of distribution:
1) The more important the company is, the deeper the investment is, and the more money is allocated.
2) The earlier you join, the greater the risk and the lower the exercise price. Generally, the exercise price of the same group of employees is the same.
3) Management and key employees are the mainstay, and some enterprises implement all-staff incentives.
Verb (short for verb) Option Grant/Grant:
The Company signs a contract with the employees, stating the following basic terms:
The number of shares corresponding to the 1) option;
2) Execute the price. Generally speaking, the price before the A round of financing is very low or free. As the company's prospects become clearer, the price will also rise. The principle of pricing is the fair value per share (that is, the reference value in the market) at the time of reward, and the incentive effect on recruiters is also considered.
3) The grant date of option calculation, that is, the time when the option is granted, is generally calculated from the entry date.
4) The term of exercise rights, that is, the time for all options corresponding to the contract to exercise rights, is generally 4 years. Generally speaking, options are granted on a monthly basis, that is, there is 1/48 per month (for example, 4 years), which means you can exercise.
5) The minimum effective period (Cliff) is generally set as 1 year after the employee has worked in the company for a certain period of time. That is to say, if the employee has worked in the company for less than 1 year, he can't exercise his rights when he leaves the company, but once he reaches 1 year, he will get 1/4 immediately, and then get 1/48 every month until he leaves the company or gets all options.
6) Deadline. After leaving the company, employees must decide whether to exercise this purchase right within a certain period of time, which is usually set to 180 days.
6. Exercise of options:
Mainly divided into two situations:
Situation 1: The contract is executed normally.
At this time, employees can exercise their rights according to the exercise price agreed in the contract and purchase the company's equity not exceeding the total amount. As long as the employee does not leave his post, this right will continue to be effective;
Situation 2: Employees leave their jobs.
If employees leave their jobs after reaching the cliff and before IPO, it is generally agreed in option contracts that the company has the right to buy back this part of options at the agreed price (called call rights). For different reasons of resignation, different terms of the right to call for payment can be formulated. Theoretically, the repurchase price should be the fair value at the time of repurchase, but it can also be agreed as other prices, such as net assets per share.
Seven. Important adjustment items:
If the company's equity changes in the process (including financing, share expansion, dividends, etc.). ), the option amount and exercise price should be adjusted accordingly, so that the value of the original right remains unchanged. The basic logic behind it is that the number of options and the exercise price reflect the value of options when they are granted rather than when they are exercised.
If the company is sold or the control right changes, it is also necessary to make corresponding agreements.
Eight, the way to achieve:
Under the framework of China Company Law, the equity must correspond to the registered capital, so it is impossible to reserve the equity. Flexible method:
1, held by the founder. When the company was established, the founder held more shares (corresponding to option pool). When the company, the founder and the employees signed a contract and exercised their rights, the founder transferred them to the employees at the agreed price.
2. Companies owned by employees. Employees hold shares in the target company through the holding company. It can avoid some inconvenience caused by employees directly holding the company's equity. This practice was widely adopted before listing in China.
3. Virtual stocks. Establish a special account book within the company, and employees will enjoy the corresponding dividend or appreciation rights according to the fictitious stocks in the account book. Huawei's approach.
Nine, matters needing attention:
1) can't promise verbally.
2) Fully communicate with employees to ensure that the information involved in the plan is open and transparent, so that employees can make reasonable judgments and expectations on their own rights and interests.