This is a family held company with a global presence in HRO services and technology solutions covering the entire hire-to-retire cycle. The founders have long industry experience and have been instrumental in setting up business organization in the global IT/ITES sector.
While it had adopted best practices for its employees, the company did not have stock grants or equity linked plan in place. The management needed expert services to help plan, design and roll out a suitable ESOP as an incentivization tool for employees.
As they were nearing superannuation, the founders felt the need to move from a family owned business to a professionally managed company and accordingly act upon the leadership planning. However they were not sure about the risks and ramifications of equity dilution under a stock option Plan.
Since the company was closely held, there was no clear-cut exit route in place. It was a complex process to introduce an equity linked Plan with multiple decisions involved at different planes, be it coverage of employees, fixing individual quantum, time /performance based vesting, pricing considerations or Trust-route v/s direct route.
ESOP Direct team first asked the founders to identify key talent in the organization. After elaborate discussions and evaluating alternative equity instruments, a stock options Plan was designed at the parent holding company to cover senior management employees selected on the basis of their criticality. The scheme parameters were arrived at after comparison with industry best practices in order to leverage the Plan to recruit and retain key talent.
Option pricing and dilution impacts were optimized for stakeholders. Exit routes were clearly prioritised with external exits as a chosen option e.g. primary listing, strategic sale and fund infusion in future. However buyback was also kept as a provision if external exit didn’t happen within due time period to give clear visibility to Plan participant about monetization opportunity.
With no past experience in equity compensation schemes, the transition from a family held organization to a near democratic system with stock options was indeed a difficult process. We first had to prepare the ground for knowledge transfer to the founders followed by a sensitivity analysis that helped them make an informed decision with regard to planning the dilution. In a complete hand holding relationship, the ESOP Direct team took the company through the planning and design process. The flexibility and versatility factors in the scheme were catalytic in creating greater trust and transparency between management and employees.