A family held enterprise with a global presence in HRO services, this compay offers technology solutions spanning the complete hire-to-retire cycle. The founders have longstanding industry experience and have been instrumental in setting up businesses in the IT/ITES sector worldwide.

While the company followed best practices for its employees, it did not have a stock grants or equity linked Plan. The management were looking to engage end to end expert services for a suitable ESOP as an incentivization tool for employees. These services would include planning, designing and implementation of the Plan.

Challenges

As they were nearing superannuation, the founders acknowledged it was time they moved from a family owned business to a professionally managed company. This required thorough leadership planning. The founders however were not aware of the risks and repurcussions of equity dilution under a stock option Plan.

As the company was closely held, there was no clear-cut exit route in place. It was a challenge to design an equity linked Plan with multiple decisions involved at different levels, be it coverage of employees, fixing individual quantum, time /performance based vesting, pricing considerations or Trust-route v/s direct route.

Solutions

When ESOP Direct took the mandate, the team asked the founders to identify key talent in the organization. Elaborate discussions followed and alternative equity instruments were evaluated. Finally, a stock options Plan was designed at the parent holding company level to cover senior management employees, The employees were selected on the basis of their criticality in the company. The scheme parameters were drawn after comparison with industry best practices so as to leverage the Plan to recruit and retain key talent.

Option pricing and dilution impacts were optimized. Exit routes were clearly defined with external exits as a chosen alternative, such as primary listing, strategic sale and fund infusion in future. Buyback was also kept as a provision in case external exit didn’t happen within due time period. This would give clear visibility to Plan participant about monetization opportunity.

Value delivered

The process of moving from a family held organization to a near democratic system with stock options was difficult, especially as the organization had no past experience in equity compensation. At the outset, we had to prepare the ground for knowledge transfer to the founders. A sensitivity analysis was then taken up, to help them make an informed decision with regard to planning the dilution. ESOP Direct team walked the company through the planning and design process in a completely hand holding relationship. We ensured the scheme had ample flexibility and versatility which helped create greater trust and transparency between management and employees.