@@tiredofeverythingnew If an employee leaves the company and holds vested options, generally the employee's entitlement to those options will survive, but you'll need to look at your specific contract for language on what happens upon termination. It depends on how the termination occurred as well (fired with or without cause, quit, etc.).
You said the first 10 employees get 10% of the equity in the company. Do you mean 10% each? Wouldn't that equal 100% of company being owned by the 10 employees? What is left for the founders? lol
Calling a stock option plan an ESOP is misleading. An ESOP is an Employee Stock Ownership Plan which is a Qualified retirement plan whereas a stock option plan is a non-qualified synthetic equity. An ESOP holds actual shares and the employees ARE actually owners and they can get beneficial tax treatment on their distributions in the future. An option plan is taxable upon exercise. I feel like you are talking about benefits of an ESOP (ownership and culture) but referring to an option plan and this is misleading. Option plans usually only apply to certain individuals whereas an ESOP will apply to most of the employees of the entire company.
Thanks - you're right, ESOP as an acronym is unfortunate because it can mean a variety of different things. Employee Ownership plans come in many different forms, from straight equity, to options, to phantom plans (e.g. no real equity at all, just a type of mechanism to participate in company profits "as if" the employee had an ownership stake). All different forms have different legal and tax treatment depending on whether they are public or private companies, and whether the corp is Canadian, US or elsewhere. In Canada, option plans for private companies that are CCPCs (Canadian Controlled Private Companies) are not taxable upon exercise; they're taxable when the equity is sold (or deemed sold; e.g. should the shareholder die). As for your comment about option plans not having similar benefits re: culture and sense of ownership in the Company ... can you tell me more?
Thank you for making it simple to understand. I just have a doubt regarding the taxation part of the ESOPs. So you mentioned that they can be taxed when they are vested. And that depending on the rules the tax can also be filed at the time of selling the shares instead of the point in time when they were vested. But I guess, and think, and feel, unless the tax rate changes, the person is going to be paying the same amount of tax overall
Hello, Thanks for making this video :) I was awarded stock options with a 5 year vesting period in a company that is still private. This award was for contract work done over a finite period in the company's early days. I have not worked for the company since the award was made and 81.25% of my options are vested. I do not know much about the companies finances, and I don't know if I can turn my vested options into cash while the company is still private. Generally is someone like me supposed to have insider information about the company's financial stature in order to decide when to exercise the shares? Is the company supposed to offer me information, like when an IPO may happen?
Hi Daniel - you may have informational rights. That depends on the articles or bylaws of the Company, as well as any shareholders' agreement that you signed onto, and the contents of your options agreement. I recommend that you pull together all of your documentation and sit down with a lawyer experienced in stock options to examine it
Can you do it from the employee point of view? i.e. what should you look out for in the T&Cs, how do you know if it's a good plan? What happens once you've decided you want to exercise your options? what happens if you leave before the vesting period is over etc.
Things that an employee would want in an options agreement: - Proper legal documents, not a mickey mouse agreement or a verbal commitment; - A strike price that reflects current FMV of Company shares; - Ability to retain vested shares whether or not the employee is terminated or quits; - Acceleration of vesting upon change of control (e.g. Company is acquired); - In a closely held (e.g. a small private or family run) company, you should also review the shareholders' agreement and understand whether or not you are required to sign onto it. A Shareholders' Agreement may further bind / restrict your ability to sell the shares, and may also impose other obligations on you (e.g. confidentiality provisions, non-competes, etc.).
Great video thank you - general question: if you are thinking about leaving the company. Doo you need to wait for an equity event to occur? or can you exercise your options if you are fully vested based on current valuation of the company? Thx.
Glad you liked the video! If fully vested, generally that means you can exercise your options unless there are some other types of restrictions baked into the agreement. Contact us at www.parrbusinesslaw.com/contact for more information!
Hi steve, very well explained. are there any specific compliances to be done when ESOP pool is created?? for a private corporation?? any filings needs to be done???
In my contract I have an amount Stock options: 500k JPY Vesting over 4 years: 15%, 35%, 65%, 100% 100 shares (1 trading unit) = 1 stock option = 1 JPY does this mean I will get 500,000/100 or 5000 shares of the company stock that will vest over 4 years?
Hi Rainmaker, hate to be a broken record, but your specific scenario should be reviewed and addressed by a professional advisor in your jurisdiction (a lawyer who is savvy on options).
Get professional advice. My channel is informational/educational. If you have real money on the line, and it sounds like you do, engage a lawyer in your jurisdiction who has experience with ESOPs. Best to get a review of the options agreement and any other relevant contracts (e.g. a shareholders' agreement might constrain your ability to liquidate equity, etc.). For more information, contact us at www.parrbusinesslaw.com/contact
Run for the hills! Just kidding. Just depends on what the value of the shares are, and what the anticipated growth of the value of the shares is going to be. If the company is going nowhere, then it's worthless. Contact us at www.parrbusinesslaw.com/contact for more information!
Can you explain what the expiration date? Like if you let the expiration date pass you could forfeit or cash out if you do it in before expiration date?
Look carefully at the language in YOUR agreement, as it will always vary. But in this example, yes I am referring to the expiration of the ability to exercise on the options (e.g. convert the options into shares). In many agreements the expiry period will be somewhere between 7 - 10 years after issuance. Contact us at www.parrbusinesslaw.com/contact for more information!
I'm a mid level sales manager, my colleague is also a sales manager in a diffferent division. He just gave notice and I know the company is going to ask me to pick up the slack. I want a raise if that happens however I dont need one. I was just thinking could the company gove me stock options instead?
Thanks for your question! A proper answer requires more context and I recommend that you reach out to a lawyer in your jurisdiction. We serve clients in British Columbia. If you are resident of Canada we may be able to assist with a referral. info@parrbusinesslaw.com
Steve -- Noting that the term ESOP in the U.S. has a very specific meaning that is quite different from how you are using it i.e. how the term is used in Canada. U.S. ESOPs, of which there are many 1,000s, are not this structure at all, they are Employee Stock *Ownership* Plans, a type of retirement plan and not a form of stock *option*. Neither one is necessarily better, simply that they use the same term to describe wholly different equity sharing tools. It's (yet another ) very interesting comparison between our two national approaches. Thanks for your insight here, very helpful to hear.
Is this correct: after the options have vested, is an employee able to exercise those options any time before the expiration date and purchase the stock at the strike price? And therefore sell those options at the higher price, also when they choose? If so, wouldn't someone exercise options as soon as they have vested? I don't see why they wouldn't
The reason you would wait is that usually options have something called a strike price (above the current stock price) which is the minimum at which you could exercise for a profit. As an exmaple, if you company value is currently $50, the company may put the the stike price at $55. Also, assume you are give 10 options (usually 100 stocks per option) resulting in 1000 total stocks. If after you vested, the stock value stays at equal or loses value and becomes less than 55, then they are not profitable and not exercisable (Read on for why). Only If the stock rise above 55 (stricke price) can you can sell it but there is a catch. You won't be making $56,000 (1000 x $56), but instead you will be making the difference between the stock price and the strike price. So in this example, your profit will be ($56 - $55) * 1000 stocks = $1,000. This of course encourages you to keep letting the stock grow because in this example, every dollar above 55 is equivalent to $1,000 of profit (before taxes)
First question: yes. Second question: maybe. Many plans restrict selling options. Third question: exercising requires cash. Sometimes it's not a priority to use cash to exercise the options. Contact us at www.parrbusinesslaw.com/contact for more information!
Pretty sure that would mean the first 70 employees have 20% of the company ownership (options) distributed amongst them, defined by their individual Stock Option packages. If distributed equally, first 10 each get 1%, then the next 10 each get 0.5% of the company, and lastly the next 50 employees each would receive 0.1% of the company in stock options. When the company was founded and 10 million shares were created, each 1% of the company would represent 100K shares. Assume the ESOP terms set the strike price at $1 per share and most options packages have around a 10 year expiration period, so say an employee with 100K shares buys 10K shares per year for 10K. After 10 years the company has been super successful and the stock price is $100 per share. That 100K shares is now worth $10 million dollars. Assuming everything I said was correct and I didn't fundamentally misinterpret anything!
If you play nice ;) Depends on what language exists in your employee/contractor/shareholder agreement. Have a lawyer check it out. Contact us at www.parrbusinesslaw.com/contact for more information!
ESOP is.. share option plan in which employees have the right to buy shares at certain price or given for free. I guess it depends on the company policies. but it's gonna be taxable for employees
@@tayemayne315 immigrants who are living in the country by LEGAL means, and hold a job will most likely be able to utilize whatever benefits that their company presents. Illegal immigrants most likely would not be able to benefit as a part of any program because they aren't supposed to be in the country, I think that's what @Justin Dingman found amusing.
@@ezjakstaify Ohh, that’s understandable. However, you do know that there are state and federal programs that help ppl despite their immigration status? Also my question was about the company owners not the employees so if you can’t help, thank you but kick rocks.
Did this video answer all your questions? Please feel free to contact me directly or leave a comment below!
Completely missed the point about what happens to the vester (or cliff) options they they have when leaving the org
@@tiredofeverythingnew If an employee leaves the company and holds vested options, generally the employee's entitlement to those options will survive, but you'll need to look at your specific contract for language on what happens upon termination. It depends on how the termination occurred as well (fired with or without cause, quit, etc.).
You said the first 10 employees get 10% of the equity in the company. Do you mean 10% each? Wouldn't that equal 100% of company being owned by the 10 employees? What is left for the founders? lol
I like how detailed this was explained compared to the other vids I watch so far
Thank you!
Such a great platform is CZcams, and CZcamsrs are the best people..
I am working on my homework. Thanks for clarification.
Thank you for the insight Ryan Reynolds!
Clear explanation. Thank you Steve!
Glad it was helpful!
Perfectly explained ❤
Glad you liked it! Stay tuned for more.
Calling a stock option plan an ESOP is misleading. An ESOP is an Employee Stock Ownership Plan which is a Qualified retirement plan whereas a stock option plan is a non-qualified synthetic equity. An ESOP holds actual shares and the employees ARE actually owners and they can get beneficial tax treatment on their distributions in the future. An option plan is taxable upon exercise. I feel like you are talking about benefits of an ESOP (ownership and culture) but referring to an option plan and this is misleading. Option plans usually only apply to certain individuals whereas an ESOP will apply to most of the employees of the entire company.
Thanks - you're right, ESOP as an acronym is unfortunate because it can mean a variety of different things. Employee Ownership plans come in many different forms, from straight equity, to options, to phantom plans (e.g. no real equity at all, just a type of mechanism to participate in company profits "as if" the employee had an ownership stake). All different forms have different legal and tax treatment depending on whether they are public or private companies, and whether the corp is Canadian, US or elsewhere. In Canada, option plans for private companies that are CCPCs (Canadian Controlled Private Companies) are not taxable upon exercise; they're taxable when the equity is sold (or deemed sold; e.g. should the shareholder die). As for your comment about option plans not having similar benefits re: culture and sense of ownership in the Company ... can you tell me more?
Very well explained. Thank you, sir!
Glad it was helpful!
Thanks for the quality content
Thank you for making it simple to understand. I just have a doubt regarding the taxation part of the ESOPs. So you mentioned that they can be taxed when they are vested. And that depending on the rules the tax can also be filed at the time of selling the shares instead of the point in time when they were vested. But I guess, and think, and feel, unless the tax rate changes, the person is going to be paying the same amount of tax overall
Hello,
Thanks for making this video :)
I was awarded stock options with a 5 year vesting period in a company that is still private. This award was for contract work done over a finite period in the company's early days. I have not worked for the company since the award was made and 81.25% of my options are vested. I do not know much about the companies finances, and I don't know if I can turn my vested options into cash while the company is still private. Generally is someone like me supposed to have insider information about the company's financial stature in order to decide when to exercise the shares? Is the company supposed to offer me information, like when an IPO may happen?
Hi Daniel - you may have informational rights. That depends on the articles or bylaws of the Company, as well as any shareholders' agreement that you signed onto, and the contents of your options agreement. I recommend that you pull together all of your documentation and sit down with a lawyer experienced in stock options to examine it
Can you do it from the employee point of view? i.e. what should you look out for in the T&Cs, how do you know if it's a good plan? What happens once you've decided you want to exercise your options? what happens if you leave before the vesting period is over etc.
Things that an employee would want in an options agreement:
- Proper legal documents, not a mickey mouse agreement or a verbal commitment;
- A strike price that reflects current FMV of Company shares;
- Ability to retain vested shares whether or not the employee is terminated or quits;
- Acceleration of vesting upon change of control (e.g. Company is acquired);
- In a closely held (e.g. a small private or family run) company, you should also review the shareholders' agreement and understand whether or not you are required to sign onto it. A Shareholders' Agreement may further bind / restrict your ability to sell the shares, and may also impose other obligations on you (e.g. confidentiality provisions, non-competes, etc.).
Great video thank you - general question: if you are thinking about leaving the company. Doo you need to wait for an equity event to occur? or can you exercise your options if you are fully vested based on current valuation of the company? Thx.
Glad you liked the video! If fully vested, generally that means you can exercise your options unless there are some other types of restrictions baked into the agreement.
Contact us at www.parrbusinesslaw.com/contact for more information!
Hi steve, very well explained. are there any specific compliances to be done when ESOP pool is created?? for a private corporation?? any filings needs to be done???
In my contract I have an amount
Stock options: 500k JPY
Vesting over 4 years: 15%, 35%, 65%, 100%
100 shares (1 trading unit) = 1 stock option = 1 JPY
does this mean I will get 500,000/100 or 5000 shares of the company stock that will vest over 4 years?
Hi Rainmaker, hate to be a broken record, but your specific scenario should be reviewed and addressed by a professional advisor in your jurisdiction (a lawyer who is savvy on options).
..,,for Canadians.
I am leaving my company I have 60% vested in my ESOP account. What are my options?
Get professional advice. My channel is informational/educational. If you have real money on the line, and it sounds like you do, engage a lawyer in your jurisdiction who has experience with ESOPs. Best to get a review of the options agreement and any other relevant contracts (e.g. a shareholders' agreement might constrain your ability to liquidate equity, etc.).
For more information, contact us at www.parrbusinesslaw.com/contact
In this scénario, is the 199$ considered capital gain or regular income ?
Hello, I received and offer letter saying they offer me “500 stock options” What does this mean? What do I do with this stock option? Thank you!
Run for the hills! Just kidding. Just depends on what the value of the shares are, and what the anticipated growth of the value of the shares is going to be. If the company is going nowhere, then it's worthless.
Contact us at www.parrbusinesslaw.com/contact for more information!
Can you explain what the expiration date? Like if you let the expiration date pass you could forfeit or cash out if you do it in before expiration date?
Look carefully at the language in YOUR agreement, as it will always vary. But in this example, yes I am referring to the expiration of the ability to exercise on the options (e.g. convert the options into shares). In many agreements the expiry period will be somewhere between 7 - 10 years after issuance. Contact us at www.parrbusinesslaw.com/contact for more information!
I'm a mid level sales manager, my colleague is also a sales manager in a diffferent division. He just gave notice and I know the company is going to ask me to pick up the slack. I want a raise if that happens however I dont need one. I was just thinking could the company gove me stock options instead?
Thanks for your question! A proper answer requires more context and I recommend that you reach out to a lawyer in your jurisdiction. We serve clients in British Columbia. If you are resident of Canada we may be able to assist with a referral.
info@parrbusinesslaw.com
Steve -- Noting that the term ESOP in the U.S. has a very specific meaning that is quite different from how you are using it i.e. how the term is used in Canada. U.S. ESOPs, of which there are many 1,000s, are not this structure at all, they are Employee Stock *Ownership* Plans, a type of retirement plan and not a form of stock *option*. Neither one is necessarily better, simply that they use the same term to describe wholly different equity sharing tools. It's (yet another ) very interesting comparison between our two national approaches. Thanks for your insight here, very helpful to hear.
Thank you for this!
is the stock option $ taken from employee's paycheck?
I've never come across that.
@@parrbusinesslaw ahh, my comment was 2 years ago. I already understand how it works.
@@wjm8353can you please explain?
Sweet new channel you've got running here!!
If you have a stock discount, how do you make money on that?
Nice
Thank you, this was super informative
You're welcome!
Is this correct: after the options have vested, is an employee able to exercise those options any time before the expiration date and purchase the stock at the strike price? And therefore sell those options at the higher price, also when they choose? If so, wouldn't someone exercise options as soon as they have vested? I don't see why they wouldn't
No as an employee you have to wait until retirement
The reason you would wait is that usually options have something called a strike price (above the current stock price) which is the minimum at which you could exercise for a profit. As an exmaple, if you company value is currently $50, the company may put the the stike price at $55. Also, assume you are give 10 options (usually 100 stocks per option) resulting in 1000 total stocks. If after you vested, the stock value stays at equal or loses value and becomes less than 55, then they are not profitable and not exercisable (Read on for why).
Only If the stock rise above 55 (stricke price) can you can sell it but there is a catch. You won't be making $56,000 (1000 x $56), but instead you will be making the difference between the stock price and the strike price. So in this example, your profit will be ($56 - $55) * 1000 stocks = $1,000. This of course encourages you to keep letting the stock grow because in this example, every dollar above 55 is equivalent to $1,000 of profit (before taxes)
First question: yes. Second question: maybe. Many plans restrict selling options. Third question: exercising requires cash. Sometimes it's not a priority to use cash to exercise the options.
Contact us at www.parrbusinesslaw.com/contact for more information!
amazing video
Thanks so much!
nice video bro
Thanks so much!
4:54: The first 10 employees get 10% equity, the next 10 5%, and the next 50 5% after that. So The first 70 employees get 400% of the company?
Pretty sure that would mean the first 70 employees have 20% of the company ownership (options) distributed amongst them, defined by their individual Stock Option packages. If distributed equally, first 10 each get 1%, then the next 10 each get 0.5% of the company, and lastly the next 50 employees each would receive 0.1% of the company in stock options. When the company was founded and 10 million shares were created, each 1% of the company would represent 100K shares. Assume the ESOP terms set the strike price at $1 per share and most options packages have around a 10 year expiration period, so say an employee with 100K shares buys 10K shares per year for 10K. After 10 years the company has been super successful and the stock price is $100 per share. That 100K shares is now worth $10 million dollars. Assuming everything I said was correct and I didn't fundamentally misinterpret anything!
If I leave a company would they buy me out from my stocks ?
If you play nice ;) Depends on what language exists in your employee/contractor/shareholder agreement. Have a lawyer check it out.
Contact us at www.parrbusinesslaw.com/contact for more information!
hey i am scared that before my probation ends i will finish the hard work and getr fired then i lose my options. how do i protect against that.
Get professional advice.
Contact us at www.parrbusinesslaw.com/contact for more information!
Does employees need to pay for ESOP
ESOP is.. share option plan in which employees have the right to buy shares at certain price or given for free. I guess it depends on the company policies. but it's gonna be taxable for employees
wow this is so helpful! I'm sending you an email :)
Can illegal immigrants receive their benefits? If not, why would a company want to create an ESOP if many of their employees can’t get it?
Lmfao
@@Dino2GunZ serious question, really don’t see the humor in it.
@@tayemayne315 immigrants who are living in the country by LEGAL means, and hold a job will most likely be able to utilize whatever benefits that their company presents. Illegal immigrants most likely would not be able to benefit as a part of any program because they aren't supposed to be in the country, I think that's what @Justin Dingman found amusing.
@@ezjakstaify Ohh, that’s understandable. However, you do know that there are state and federal programs that help ppl despite their immigration status? Also my question was about the company owners not the employees so if you can’t help, thank you but kick rocks.
Hi I have some questions can you message me privately? Or is that not possible?
Hi there, get in touch with our legal experts here: parrbusinesslaw.com/contact (please note - we only serve Canadian clients)