ESOP

What is an ESOP?

An ESOP (Employee Stock Ownership Plan) is a type of incentive programme that allows its participants to benefit from the future growth of the company. It is a form of additional remuneration for top-performing employees — those who contribute most significantly to the company’s increasing value. A well‑designed and properly implemented ESOP is one of the most effective methods not only for retaining key employees but also for attracting new talent — particularly in young companies (startups) that may not yet have sufficient financial resources to offer high salaries.

ESOPs most commonly cover individuals in senior management positions (e.g., managers, project leaders, etc.), but they may also include members of the executive team, for whom a separate programme based on different rules may be created — an MSOP (Management Stock Option Plan).

The primary purpose of an ESOP is to create an additional remuneration system that motivates participants to continue contributing intensively to the company’s success. Participants have the opportunity to benefit from the future increase in the company’s value. It is essential that the events entitling participants to exercise the rights granted under the programme are precisely defined in the document governing its terms — the ESOP Rules.

In practice, ESOPs may be structured based on different forms of participation in the company, such as:

In the first and third cases, the structure allows participants to acquire actual shares or interests in the company — meaning they become co‑owners. In practice, such participation (resulting from joining the programme) may reach up to 20% of all shares or interests.

However, an ESOP based on these principles constitutes a significant intervention in the company’s ownership structure — joining such a programme typically results in an actual expansion of the shareholder base (although in the case of warrant‑based ESOPs, certain practical solutions may help avoid this).

Additionally, current tax regulations are more favourable to implementing and executing ESOPs in joint‑stock companies than in limited liability companies (due to the acquisition of shares in joint‑stock companies), which may pose challenges for new businesses — most of which are established as limited liability companies.

Due to these limitations, as well as convenience and a relatively high level of security for the company, ESOPs based on “virtual” shares or interests — Options — are becoming increasingly popular.

Unlike traditional plans (based on “real” shares or interests), Options do not grant the holder (i.e., the programme participant) the right to acquire actual shares/interests. Instead — upon exercise — they result in the obligation to pay a specified cash amount or provide non‑cash remuneration (provided that the conditions for exercising the Options, which must be precisely defined in the Rules, are met).

Options do not grant any form of participation in the Company, in particular:

• no right to information,
• no voting rights,
• no right to attend or vote at shareholders’ meetings,
• no right to participate in the company’s net profit as shown in its financial statements.

This type of incentive system may cover not only employees but also contractors and individuals cooperating with the company under B2B agreements — the company itself decides who becomes a participant and what the eligibility criteria are.

An ESOP based on “virtual” shares or interests therefore appears to be a convenient and, above all, safe alternative for the company compared to standard incentive systems commonly implemented in corporate structures.