ESOP Valuation Services and Advisory Solutions

OPTION POOL

The option pool contains a part of the venture’s shares that can be given in options to the workforce in the forthcoming time. The ESOP defines the number of shares in the option pool and the class of shares it encompasses.

Most of the time, the option pool comprises nonvoting shares so that the employees can be at an advantage as the company progresses without having to vote for management problems. The size of the option pool should be carefully formulated. Usually, business founders opt for a conventionally sized pool to prevent their ownership dilution.

In contrast, employees, investors, and other shareholders opt for a large-sized option pool to get ample options. As long as the option pool exists, its shares cannot be utilized for any other reason.

The option pool is visible on the company’s cap table to indicate that they do not belong to its founders. However, materialistically, these shares are not owned by anyone and hence do not affect the founders’ ownership till they are given.

OPTION AWARD AGREEMENT

The actual agreement between the company and an employee that reflects the terms and conditions or the receiving options related to the awarding of stock options is the option award agreement. The option award agreement states each of the employee’s options, whereas the ESOP is the policy document.

The agreement mentions the various options given to each of the staff members. It also specifies the Exercise price that each of the employees should pay to obtain the shares. The ESOP must comprise a generalized sample of the option award agreement, enabling all the contracts to follow a standard form. However, the option award agreement should be tailored every time a staff member signs it.

OPTION EXERCISE PRICE

The option exercise price is also known as the strike price. It indicates the price that each workforce member has to pay to buy the shares in the future. The option exercise price must be fixed in the option award agreement, although it is not paid right away. The workforce will obtain the most benefit from a lower exercise price.

However, the exercise price cannot be meager because it can have negative tax implications on the company and its employees. It should indicate the fair market value of the shares on the date choices and not when the stakes are bought.

It needs a practical evaluation of the present fair market value of a company’s shares every time an option is given. We, at Valueteam, can suggest the most suitable exercise price for providing options. Moreover, the options denote the present value of the shares and enable the workforce to get benefits from the venture’s progress.</p[>

OPTION EXPIRY DATE

As the total number of options in an option pool is restricted as per the conditions in the option pool, options have predefined expiration timelines. It helps the company re-issue the shares to another employee when an employee does not want to change the options into shares by buying at the exercise price.

The option expiry date is of significance when employees quit their jobs. Such employees will have a fixed number of days to use the options and buy the shares. If the employees fail to act within the fixed timelines, the options’ expiry occurs, and the options get accumulated into the option pool.

The other usual expiration timelines are when the employees’ options have entirely vested. In such a situation, the employees should determine if they want to use the options and buy shares. If the options are not used after completely vesting, they will get accumulated in the option pool.