ESOS: Frequently Asked Questions (FAQs)
- What is an employee share option scheme (ESOS)?
Essentially, ESOS is a type of share incentive plan that rewards its employees or directors with options to buy the company’s shares in the future at a pre-determined price, at the fair market value or at a discounted rate.
- How does ESOS work?
Once the company awards the options, the participant will need to remain employed over a vesting period or achieve certain specified milestones (including key performance indicators), in order for the options to become exercisable.
Vesting of the options means the participant has to “earn” the right to subscribe for the actual shares of the company by meeting the conditions set by the company.
- How does ESOS benefit the Company?
Generally, ESOS can be used to attract and retain talent, and motivate them to be aligned with the company’s goals.
Especially for start-ups with high growth & rapid expansion plans, ESOS can be awarded in lieu of traditional methods of cash compensation. It is a powerful motivational tool to attract and retain talents, giving them an asymmetrical upside of capital gains in the future, and reducing the company’s much-needed liquidity from high salaries or bonuses.
- Are there other types of share incentive programmes?
Yes. The main types of share incentive schemes are categorized as:
- those that result in the actual ownership of shares, such as ESOS, Employee Share Purchase Plans (“ESPP”), Share Award Scheme (“SAS”); AND
- those that do not result in the ownership of shares, such as Share Appreciation Rights Scheme (“SARS”), or phantom share plans (“PSP”).
- Who can award or administer ESOS?
Depending on the By-Laws, the administration of ESOS is typically done by the Board of Directors, which can then authorise a subcommittee, any individual director or member of the management team (e.g. hired CFO/COO/HR/Founders) with delegated powers to administer the ESOS on behalf of the Board.
- Who can be awarded?
ESOS are primarily meant for employees and directors with valid employment contracts of service. Publicly listed companies are not allowed to award ESOS under the Bursa Listing Requirements. Private companies that award ESOS to their non-employees such as independent contractors and advisors could face uncertainties under both the securities and tax laws. Professional advice should be obtained.
- What are the usual documents needed in an ESOS?
A proper ESOS typically comprises a set of By-Laws, Offer Letter and Exercise Notice. These are highly customizable documents which can affect the overall outcome and legal implications to both the participant and company. Public listed companies must also comply with the Bursa Listing Requirements which may be amended from time to time.
- How big should the pool of options be?
A broad rule of thumb is that a company usually reserves around 10% to 15% of a company’s total shares on a fully diluted basis for ESOS. This figure is purely for maximum allocation purposes, the company does not have to award/utilise all the options from the get-go.
Issuing large number of options could mean the company’s equity being diluted in the future when the options are exercised.
- What should the exercise price of the options be?
This would be a commercial decision made by the Board or sub-committee administering the ESOS. The setting of the exercise price differs between private unlisted companies (early-stage start-ups / SMEs) and public listed companies which are restricted by the Bursa Listing Requirements. There are also tax implications from the exercise price to be considered.
- What are the laws that are applicable to an ESOS?
Introducing any equity incentive plan involves a careful process of designing, planning, drafting of documents, regulatory compliance, ongoing reporting obligations & proper administration of the plan. The planning and administration of an ESOS also involve the consideration of various specific laws including securities, company, tax, EPF and labour laws.
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Link to consultation booking: How D&H can help you with setting up your ESOS?
We can assist our clients with:
- Advising on pros and cons of different types of equity incentive plans
- Designing and structuring the plan according to your company’s preferences
- Drafting customized legal & incidental documents under the plan
- Advising on legal regulatory and compliance under Malaysian laws
- Attending to initial tax filings upon launch
- Providing live training to management or participants
Feel free to contact us by sending us an email or booking an introductory call to explore how we can assist you.
