(revised 11 February 2020)
Employee share option plans (or ESOPs) are a key tool for startups to incentivise staff and hire talent. Unsurprisingly, one of our most-used Southeast Asia resources is our ESOP rules template.
To make it easy, we’ve put together this guide to help you through the process of adopting your ESOP, setting up your option pool, and granting options.
Related guides you might also find useful:
- 5 key commercial decisions you need to make about your ESOP before you start (a good precursor to this guide)
- Tricky clauses: what happens to an employee’s share options when a company exits?
- Tricky clauses: what is founder vesting?
Ok, let’s get started. Here are the steps that you need to take in order to set up an ESOP in your startup. This is based on industry standard for startups that have a headco and employees based in Singapore – your mileage may vary for companies domiciled in other countries.
Your ESOP rules set out the terms that apply to all options granted under the plan, including the process for granting options, how and when employees can exercise their options, and what happens to the options on an exit event, or if an employee leaves.
If you’re using our template ESOP rules that document will include the following schedules:
- schedule 1 – a grant letter setting out the terms of the options you want to grant to recipients
- schedule 2 – the form of the exercise notice to be delivered to the company when an option holder wants to exercise their vested options
- schedule 3 – an option certificate which records the number of options, exercise price and vesting provisions.
2. approve the rules and the option pool
Once you are happy with your ESOP rules, your directors and shareholders will need to sign some corporate approval documents to adopt the ESOP rules and set up your option pool.
For Singapore companies, these resolutions will typically be prepared by your corporate secretary. If your company is based elsewhere in Southeast Asia, we recommend confirming this step with a local law firm.
board and shareholder approval
You should ask your corporate secretary to prepare a set of directors’ resolutions in writing for the directors of your company to sign and a similar set of shareholders’ resolutions in writing for your existing shareholders to sign. The resolutions should include the following:
- approval of the ESOP rules
- the total number of options in the ESOP pool.
- authorisation for the board to grant options to recipients of their choosing (up to the number available in the ESOP pool), and
- authorization to issue shares on any exercise of the options
shareholder waivers and consents
Your constitution and shareholders’ agreement (if you have one) may include pre-emptive rights on the issue of new shares.
If this is the case, those shareholders with pre-emptive rights will need to sign a waiver in respect of any options granted under the ESOP (and any shares issued on the exercise of those options). If required, you should ask your corporate secretary to prepare this shareholders’ waiver as well.
Finally, you should also check your existing constitution and shareholders’ agreement (if any) for specific consents required from any shareholder in order to issue shares, grant options, or establish an ESOP. For instance, if you have been through an external funding round, your investor may have a veto right over the issue of any new shares or options. If that is the case, you will need that party’s written consent to grant options and issue shares under the ESOP.
Now you are ready to begin granting options.
Here’s what you need to do to grant options to selected recipients.
prepare your directors’ resolutions
Each time you want to grant options, you should ask your corporate secretary to prepare a new set of directors’ resolutions in writing, approving the grant of options to a specific recipient (or list of recipients).
send each recipient their grant letter
Send each recipient:
- a completed & signed grant letter (that includes the number of options granted, the exercise price, and the vesting schedule). Our template ESOP rules include a template letter of grant at (see schedule 1) which should form the base of each grant letter.
- a copy of the ESOP rules attached (note: the schedules attached to the ESOP rules themselves should be left blank in all cases.)
If the recipient accepts the offer, they should counter-sign the letter of grant and return it to you.
issue the option certificate
Once you have received the countersigned letter, you can issue them their option certificate.
In our ESOP rules template, you can find the option certificate form in schedule 3 (again that schedule should be left blank and a separate option certificate provided to the recipient – i.e. you need to create a fresh, separate Word doc).
update your option register
Internally, you should also be keeping an option register, which is a record of all the options the company has granted, the vesting schedules, expiry dates, and exercise dates.
how can an option holder exercise their options?
If an option holder wants to exercise their options, the first thing to do is check whether those options have vested in accordance with the option holder’s vesting schedule and have not expired under the ESOP rules.
If the options have vested, the option holder should deliver an exercise notice to the company. Our template rules include a template exercise notice that can be used for this. If you’re using our template rules, the process for exercising options is set out in Rule 5.3.
Setting up an ESOP is not too difficult once you have a set of ESOP rules that you are happy with. In most cases. your company secretary will be able to prepare all the necessary resolutions pretty efficiently.