Employee Stock Options

Concept, Design & Approach

 Why ESOPs ?

THE PROVOCATION
¬ Link personal wealth creation to organizational wealth creation

¬ Attract and retain talent at the start-up / growth stage

¬ Reduction in cash costs - market pays not the company – can be especially
important for start-up companies that are cash starved

¬ Promote employee ownership culture

¬ Industry practice

¬ When ??
¬ Growth story is reasonably certain
¬ Exit / liquidity event reasonably certain / exists

A must-do when on the threshold of growth

 Consulting & Advisory Services

CONSULTING & ADVISORY

¬ Designing ESOP Schemes

¬ Review of existing ESOP Schemes

¬ ESOP Valuation & Accounting

¬ Advice on India-specific issues for International ESOP Schemes

¬ Corporate actions

¬ Internal marketplace
 The C3 model

DESIGNING AN ESOP S CHEME

¬
3
Conceptualization

Consummation

¬ Communication
 Conceptualization

D E C I S I O N P O I N T S
¬ Objective and Coverage
» A thank-you for past loyalty and performance
» Incentive to drive future value
» Promote employee ownership culture CORPORATE STRATEGY

¬ Quantum
» Attractive enough to create “wealth”
ESOP
¬ Coverage STRATEGY

» Do I have enough equity ?

» Ok, I have enough equity – now what ?
» What are my objectives ?

¬ Pricing
» Fair market value – more dilution, no accounting charge
» Discount – less dilution, benefit buffer with accounting charge
» Is a discount called for ?
 Conceptualization

D E C I S I O N P O I N T S
¬ Dilution
» Broad based vs selective
» Equity or cash (phantom)

¬ Vesting
» Time based or performance based
» Standard across the board or different for key people
» Uniform, front-ended, back-ended

¬ Policy
» Yearly / half-yearly / quarterly grants
» New joinees – eligibility and effective date of grant
» Promotions / group company transfers / termination / retirement

¬ Legal Structure
» A holding co abroad with a sub in India
» Whether in the holding co or the sub ?
 Consummation

C O N S U M M A T I O N

¬ Board / Compensatory Committee and Shareholders’ resolutions

¬ ESOP Scheme documentation

¬ ESOP Agreement

¬ Secretarial Manual
 Communication

C O M M U N I C A T I O N
¬ Initial
¬ Grant letters
¬ Notice of Option Grant
¬ ESOP Manual and FAQs
¬ Disclosure document as per SEBI Guidelines

¬ On-going
¬ Financial performance
¬ Stock performance
¬ Future growth trajectory
¬ ESOP as a long-term instrument
 Design Approach

M E T H O D O L O G Y
¬ Phase I (Day 1)
¬ Initial discussion with the management to understand the
¬ business model and growth strategy
¬ objectives of the ESOP Scheme – attraction, retention, reward for
loyalty, reward for performance, etc – with the relative importance
¬ current compensation strategy and probable future policy

¬ Brief visit to various departments / Factory tour

¬ Phase II (Week 4)
¬ Collection of employee and financial information in specified
formats
¬ Analysis of information and preparation of a broad – level
framework
¬ Discussion of the broad – level framework with the management
and identify changes to be made
 Design Approach

M E T H O D O L O G Y
¬ Phase III (Week 8)
¬ Incorporation of proposed changes
¬ Submission of the final framework – specific number of options per
employee, exercise price, vesting schedule and proportion,
vesting conditions, exercise period, separation rules, etc.
¬ Sign off on the final framework

¬ Phase IV (Week 10)

¬ Legal documentation
¬ ESOP Scheme
¬ ESOP Agreement
¬ Board and shareholders’ resolutions
¬ Disclosure document as per SEBI Guidelines
¬ Secretarial Manual

¬ Communication pack
¬ Grant letter
¬ Notice of grant
¬ ESOP FAQs
¬ Employee communication session
 Valuation & Accounting
I N D I A N G A A P, U S G A A P & I F R S 2

¬ Valuation of Employee Stock Options

¬ Accounting of Employee Stock Options

¬ Statutory Disclosures
 Valuation & Accounting

V A L U A T I O N OF E M P L O Y E E S T O C K O P T I O N S

¬ Calculation of Intrinsic value of options as per Indian GAAP

⌐ Calculation of Fair Value of options as per Indian GAAP,US GAAP (S

FAS 123R) and IFRS 2

⌐ Interaction with auditors

Frequency - Every Grant Date

 Valuation & Accounting
ACCOUNTING OF EMPLOYEE STOCK OPTI ONS

⌐ Computation of Compensation cost to be amortized over the

vesting period in accordance with Indian, US GAAP & IFRS 2

⌐ Amortization of Compensation cost during each quarter

⌐ Financial year end adjustment of Compensation cost

considering the resignations and other separations during the
year

⌐ Interaction with auditors

Frequency - Quarterly and Yearly

 Valuation & Accounting

ANNUAL DISCLOSURES

¬ All statutory disclosures relating to ESOPs in accordance with

Indian, US GAAP, IFRS 2.

Frequency - Annually
 Plan Management

PLAN MANAGEMENT
¬ Data Management
» Online report to employees
» Grants
» Vesting
» Online Exercise
» Separation

¬ Employee Satisfaction
» 24x7 access to individual ESOP data, vesting forecast & option
valuation
» Online Reports
» E-mail alerts prior to vesting, lapse of options, share price reaching a
target level
» Intimation on issue of shares
» E-mail help desk
 Plan Management

PLAN MANAGEMENT
Our Managed Service Offering Application
¬ Proprietary web application
¬ conceptualized, developed and maintained in-house

¬ Hosted on our servers

Participants
¬ On-line access to employees globally
¬ Facilitates on-line exercise
Stock Option Management
¬ “What-if ” analysis for participants
ESOP Manager ¬ Management and Participant reporting

Oracle / MS SQL, . Net

Client involvement
VB, Access
¬ Only for communicating
Intel based NT servers ¬ Grant details
¬ Separations and cancellations
¬ Issue of shares
 Why Us ?

OUR VALUE PROPOSITION

Focus
¬ The only specialised ESOP firm in India

¬ The only ESOP Administrators in India in the organized sector

¬ End to end solutions in stock-based compensation

¬ Holistic approach – HR, Legal and Accounting Perspective

Experience
¬ More than 200 mandates, domestic and overseas, for listed and unlisted
companies

¬ Ability to structure and administer International plans

¬ Sector experience: Banking, Pharma, Manufacturing, Telecom, Software,

Construction, Aviation
¬ Local administrators for UK/US plans
 Why Us ?

OUR VALUE PROPOSITION

Economies of Skill
¬ Knowledge of diverse practical problems faced by corporates post ESOP
implementation

¬ Continuous value addition to clients based on practical knowledge

¬ Strong focus on Research and knowledge base

¬ Leads to economies of skill – improved service levels due to focus only on
one area

Policy making
¬ Representation on the SEBI Committee for ESOPs

¬ Co - authored the Guidance Note for the ICAI

¬ Presence in global forums and conferences

¬ India Chapter leader for Global Equity Organization (GEO)

¬ Pioneering research and studies on the subject

 Why Us ?

OUR VALUE PROPOSITION

Lineage
¬ Parent company – Kirtane & Pandit, Chartered Accountants – over six
decades old

¬ KPIT Cummins Infosystems – one of the fastest growing listed software

company

¬ KP Group is 3800 people strong

 Our Clientele

IT / ITES BANKING / FIN. INST DIVERSIFIED

 Our Clientele

PHARMA BANKING / FINANCIAL INSTITUTIONS

OTHERS
 Leadership

The Core Team

 Harshu Ghate

L E A D E R S H I P
Present responsibilities
Harshu Ghate is the co-founder and Managing Director of ESOP Direct. Apart from handling the overall management of
the Company, Harshu devotes time on critical assignments on ESOP consulting, US GAAP and statutory compliance
issues. Harshu heads the Research,Knowledge development and Branding efforts of the Company. He has conceived and
developed the ESOP administration methodologies and software solutions for the first time in India. He also devotes
time in conceptualizing new software solutions in the field of ESOP administration

Experience
Harshu has more than 18 years of post qualification experience in the area of Corporate Finance, Accounting and
Financial management. He started his career in 1985 as a Partner with Kirtane & Pandit Chartered Accountants, a well
known accounting firm. In 1991 he co founded the Investment Banking arm of the firm and headed it for 7 years. In
1999 he co founded ESOP Direct and continues to head it.

Harshu is very active in the policy making initiatives on ESOPs in India. He is a member of SEBI’s committee on ESOPs
and is co authoring the Accounting Standard for Expensing ESOPs for the Institute of Chartered Accountants of India. He
speaks regularly in national and International conferences on ESOPs and is the India chapter leader of Global Equity
Organization ( a US based organization with over 1000 members all over the world).

Education
Harshu is a Fellow member of the Institute of Chartered Accountants of India (FCA) since 1985 and a licentiate member
of the Institute of Company Secretaries of India since 1987. He is a Commerce graduate from Pune University.
 Tarun Gulati

L E A D E R S H I P
Present responsibilities
Tarun Gulati is the Vice President and heads the day-to-day operations of the firm. He devotes most of his time
interacting with clients and developing stock-based compensation solutions specific to their requirements. He leads a
team of Chartered Accountants and MBAs who deliver ESOP Consulting and ESOP Management solutions to the clients.
He also tracks the developments in the field of stock-based compensation in India and in the international arena.

Experience
Before joining ESOP Direct, Tarun has worked with PricewaterhouseCoopers (PwC) in areas related to Corporate Law.
He has also worked with the Indian pet food venture (Brand Pedigree) of the Mars, Inc. group, the global confectionery
and pet food giant. He has authored articles on macroeconomics, international finance and stock markets in
newspapers and other journals.

Qualifications
Tarun is a qualified Company Secretary.
 Prachi Worlikar

L E A D E R S H I P
Present responsibilities
Prachi Worlikar is the Sr. Manager – Consulting and is responsible for ESOP Valuation and Accounting Services.

Experience
With her experience in Employee Stock Option Administration, Internal Audit & Finance, Prachi has been associated
with various clients for Design, Implementation & Administration of Employee Stock Option Schemes in compliance with
respective regulations. She has also developed & implemented Software product for Employee Stock Options
Management , calculating Fair Value of Options in compliance with US GAAP (FAS 123(R)). In addition to this, she is also
experienced in Review of Restatement of Indian Accounts under US GAAP.

Qualifications
Prachi is a Certified Public Accountant (CPA) from Massachusetts Society of Certified Public Accountants, USA as well as
a Chartered Accountant (CA) from the Institute of Chartered Accountants of India, New Delhi. She has also completed
Level - II of the Certified Equity Professional course.
 Thanks for your time
www.esopdirect.com

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Management
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