The documents governing the rules of an ESOP program (such as the Program Rules and the Allocation Document) typically incorporate specific mechanisms that define when, how much, and in what form a participant will receive the benefits arising from the program.

Below are the most important ones:

Vesting

This mechanism grants participants rights under the program progressively over time, based on the duration of employment or collaboration. Its primary purpose is to protect the company’s interests (i.e., to minimize the risk of premature departure) and to motivate the participant to continue working with the company. Typically, the longer the cooperation lasts, the greater the entitlements — in line with the principle of proportionality.

Cliff / Minimum Vesting Period

A commonly used solution is the “Cliff” — a period during which no rights are vested, but the entitlements accrued during that time are granted only after the Cliff period ends. An alternative is the Minimum Vesting Period, where the overall vesting timeline is divided into shorter intervals, and rights are granted cyclically — for example, annually.

Good Leaver / Bad Leaver

The scope of entitlements may (but does not have to) depend on the circumstances under which the participant’s cooperation with the company ends. A participant who joins a competitor or is dismissed for misconduct is treated differently than one who leaves due to retirement, health deterioration, or group layoffs. It is standard practice to differentiate the final benefits based on the reason for departure.

Triggering Events

The Program Rules should clearly define when and under what conditions a participant is entitled to actually receive the program benefits (usually monetary). Typical triggering events include:

  • (i) Sale of all or a significant portion of the company’s shares/equity
  • (ii) Acquisition of a major external investor

Such events usually reflect the achievement of the company’s strategic investment or growth goals. In classic terms, this refers to a situation where the company is sold, acquired, or disposes of key assets at a favorable price. The resulting gains should be redistributed to option holders as contributors to that success.

To protect the company, it is important to define critical conditions — i.e., situations where none of the listed triggering events will entitle the option holder to exercise their rights (e.g., if after a transaction, existing shareholders still hold more than 50% of the company’s equity).

Exercise Price

In practice, there are two main approaches to the cost of exercising rights: paid and unpaid. Increasingly, participants must pay a defined price to exercise their rights — typically only upon actual realization. This price (often called the Exercise Price) may be fixed in the program or variable, depending on the stage of execution and other factors. Whether fixed or formula-based, the price is one of the most critical elements of the program. It should reflect the actual benefit of joining the ESOP and is often a decisive factor for participants.

Requiring payment reinforces the psychological value of the program — participants who pay are more likely to appreciate its significance.

However, many ESOP-based incentive programs are structured as non-contributory, emphasizing that participation generates benefits without financial burden for the employee or collaborator.

Transfer Restrictions

For security reasons and because ESOP participation is typically reserved for a defined group (i.e., key employees or collaborators), any transfer, pledge, lending, or other disposition of acquired rights should be prohibited. Participation should remain strictly personal.

A common exception is inheritance. In such cases, heirs should be bound by the Program Rules. The Rules should also specify the procedure when multiple heirs inherit rights, including the scope of their entitlements and obligations.