Question about ESOP

[aamaterasu]

Hi guys,

I recently changed job and the startup company offered ESOP as part of their package. It vest in 4 years with 25% increment each year.

Can I check what it means is that after 1 year I can exercise the right to purchase 25% of the specified esop amount at the previous valuation and is able to sell at the current valuation?

However this is a private company. So I cannot really sell it right? What happens to the vested stock if I want to leave the company?

Thank you.

 

[reddevil0728]

Hi guys,

I recently changed job and the startup company offered ESOP as part of their package. It vest in 4 years with 25% increment each year.

Don't get what you mean by 25% increment each year. what increases?

Can I check what it means is that after 1 year I can exercise the right to purchase 25% of the specified esop amount at the previous valuation and is able to sell at the current valuation?

Depends on what the plan rules state, what you are suggesting isn't clear. you are putting down what you are interpreting so hard to know what the plan rules really state.

However this is a private company. So I cannot really sell it right? What happens to the vested stock if I want to leave the company?

Thank you.

cannot sell unless they got feature where the company buy back as an example.

plan rules will also include leaver provision.

read the plan rules.

 

[BBCWatcher]

Usually it’s pretty simple. Let’s suppose the total offer is for 100 shares. At the end of the first year you get 25 shares. Another 25 shares at the end of the second year. And so forth.

If for example you leave the company after 1.5 years and the company’s stock is not publicly traded then ordinarily they buy the 25 shares from you (the only shares that have vested after 1.5 years with the company) at some private and “fair” price. If the company‘s stock is publicly traded when you leave (or even before you leave) then you should be able to sell your shares if you wish.

If these shares are actually stock options then it gets more complicated, but ESOPs are frequently as simple as I’ve described. They’re basically variable retention bonuses tied to the overall performance of the company (as a notional or actual stock market would value it).

I believe in Singapore you’re taxed when each tranche of shares vests. If that’s correct you just have to be aware of lesser take home pay but with shares you may not be able to sell depending on the rules of the program.

In some programs a private corporate buyout might accelerate vesting, but even if not you would profit in the upside of any such buyout at least to the extent your shares are vested. Many companies explicitly aim for being attractive acquisitions.

If this is a foreign company then the vested shares may be estate taxable (upon your demise) because they’re considered assets domiciled in that country. I suppose it’s also possible for an ESOP to have an accelerated vesting clause, meaning if you were to die before vesting the remaining shares would still vest.

Anyway, I’m sure you can ask for and get a plan summary to consider the offer. I’m guessing to some extent since ESOPs can vary a bit.

 

[reddevil0728]

Usually it’s pretty simple. Let’s suppose the total offer is for 100 shares. At the end of the first year you get 25 shares. Another 25 shares at the end of the second year. And so forth.

Is that what it means by 25% increment?

If for example you leave the company after 1.5 years and the company’s stock is not publicly traded then ordinarily they buy the 25 shares from you (the only shares that have vested after 1.5 years with the company) at some private and “fair” price. If the company‘s stock is publicly traded when you leave (or even before you leave) then you should be able to sell your shares if you wish.

it depends on what the plan rules says

If these shares are actually stock options then it gets more complicated, but ESOPs are frequently as simple as I’ve described. They’re basically variable retention bonuses tied to the overall performance of the company (as a notional or actual stock market would value it).

I believe in Singapore you’re taxed when each tranche of shares vests. If that’s correct you just have to be aware of lesser take home pay but with shares you may not be able to sell depending on the rules of the program.

In some programs a private corporate buyout might accelerate vesting, but even if not you would profit in the upside of any such buyout at least to the extent your shares are vested. Many companies explicitly aim for being attractive acquisitions.

If this is a foreign company then the vested shares may be estate taxable (upon your demise) because they’re considered assets domiciled in that country. I suppose it’s also possible for an ESOP to have an accelerated vesting clause, meaning if you were to die before vesting the remaining shares would still vest.

Anyway, I’m sure you can ask for and get a plan summary to consider the offer. I’m guessing to some extent since ESOPs can vary a bit.

yes plan rules matter.

 

[BBCWatcher]

Is that what it means by 25% increment?

Yup. That’s a pretty popular formula.

The company can still terminate the employee, and (ordinarily) unvested shares won’t vest. So you should take this factor into account as you value the ESOP. Or the company can award even more later if it wants to increase the retention incentives. And hopefully obviously the stock could end up worthless, like winning the lottery, or somewhere in between.

 

[milkfish]

Note that for private company esop (often not technically esop, e.g. phantom shares or share appreciation rights) have a completely opaque valuation. Meaning the company can decide to buy back at any price if you leave the company, until company becomes public. Because (depending on plan) oftentimes you'll not technically be shareholders, your rights are also usually quite minimal.

Treat esop like a bonus, something that's nice to have if it eventually cash out.

 

[reddevil0728]

Note that for private company esop (often not technically esop, e.g. phantom shares or share appreciation rights) have a completely opaque valuation. Meaning the company can decide to buy back at any price if you leave the company, until company becomes public. Because (depending on plan) oftentimes you'll not technically be shareholders, your rights are also usually quite minimal.

Treat esop like a bonus, something that's nice to have if it eventually cash out.

If it’s a startup, they may still give shares/share options and vesting upon exit event.