Employee stock option and Incentive plans

Employee stock option and Incentive plans

An employee stock option plan (ESOP) is a program that allows employees to purchase shares of their employer’s stock at a predetermined price, known as the exercise or strike price, within a specified period, typically referred to as the vesting period.

Here is a brief description of how an ESOP works:

Granting of Options: Employees are granted stock options as part of their compensation package or as a performance incentive. The number of options granted, the exercise price, and the vesting schedule are typically outlined in the ESOP agreement.

Vesting Period: Stock options typically vest over a specified period, during which employees must remain employed with the company to exercise their options. Vesting schedules can vary, but common structures include cliff vesting (where options fully vest after a certain period) or graded vesting (where options vest gradually over time).

Exercise Period: Once vested, employees have the right to exercise their options by purchasing shares of company stock at the predetermined exercise price. This allows employees to acquire ownership in the company and potentially benefit from increases in the stock price over time.

Tax Implications: The tax treatment of stock options varies depending on the jurisdiction and the type of options granted. In most cases however, for a Canadian-Controlled Private Corporation that issues options to its employees under a certain monetary threshold, employees are not taxed when they receive or vest their options but may be subject to taxation when they sell the underlying stock.

ESOPs serve as a powerful employee incentive tool, aligning the interests of employees with those of shareholders by giving employees a stake in the company’s performance and success. By providing employees with the opportunity to share in the company’s growth, ESOPs can help attract, retain, and motivate talented employees. ESOPs can also serve as a retention tool, as they often include vesting requirements that incentivize employees to remain with the company for a certain period to fully realize the benefits of their stock options. Speak with one of our corporate lawyers as to whether establishing an Employee Stock Option Plan or Incentive Arrangement may be beneficial for your business.