What should be the exercise price/strike price of an Employee Stock Option?

The exercise price for a stock option will depend on the objective for which the ESOPs are being granted. ESOPs for employees can be granted based on different considerations by different companies. In fact, even with respect to different employees within the same company, the exercise price may be different, as the ESOPs may be granted to the different employees by the company with different objectives in mind. Let us elaborate on how it works.

Remuneration lower than the market level

If you are granting ESOP benefits to your employees in lieu of salary, with the objective of making up for the lost compensation for an employee who has taken a huge salary cut and joined a start-up, it is only fair that the ESOPs be granted to the employee at an exercise price which is as low as possible. Typically, that would be the par value (or the face value) of the shares. The typical face value is INR 10, though, it differs from company to company. It would be advisable to check the face value of your company’s equity shares before finalizing the exercise price.

Market level remuneration

If your employees are already drawing market level salaries and the stock options are granted to them in the form of added incentive or bonus, then the exercise price of the options should be higher.

For example, if you are granting ESOPs soon after a fundraising round, then you could use the valuation of shares assigned by the investors in such round as the benchmark. So, if you have issued shares at a price of INR 100 per share to the investors, you could fix the exercise price at INR 100 per share or maybe at a discount to the fair market value, for instance, INR 80 per share.

I often get asked, if INR 100 (i.e. issuing shares at the fair market value) to the employees would be an unfair exercise price. I honestly don’t think so, simply because the employee is not going to buy the shares immediately. The employee can only buy the shares depending on the vesting date as per the vesting schedule, which will be after a minimum period of 1 year in India (given the mandatory 1 year cliff period). By that time, hopefully the fair market value of the shares of your company would increase. Therefore, at the time of exercise date, the ESOP still benefits the employee as the exercise price would be a discount to the then fair market value of the shares of your startup.

Did you know that registering for Startup India is a breeze? Myth Vs. Reality!

Given our experience in helping startups obtain Startup India recognition, we are surprised at how many people still think it is a cumbersome exercise. The process is so easy and painless, that getting a Startup India recognition now is less than a day’s job!

Startup Recognition now takes only a day!

In this blog, LexStart aims to clarify the popular myths around the process for a Startup India recognition. Please click here to read more.

Small Factories Bill

art-1192793At present, small and medium enterprises are required to comply with multiple labour laws which takes a toll on such generally resource-strapped enterprises. In an attempt to further strengthen the Government’s mission to promote ease of doing business in India, the Labour Ministry is looking to revive the Small Factories (Regulation of Employment and Conditions of Services) Bill in 2014 (“Small Factories Bill”).

What entities are covered by the Small Factories Bill?

Manufacturing companies which have less than 40 employees in a factory fall within the definition of a ‘small factory’, unless the small factory carries on a hazardous manufacturing process. In case of the later, the existing Factories Act will continue to apply.

What are the basic features of the Small Factories Bill?

  • Small factories will not have to comply with 14 legislations, including the Factories Act, ESI Act, EPF Act and the relevant Shops and Establishment Act.
  • Provisions of various labour laws, such as standards for the wages to be paid to employees, working conditions, facilities on the premises, etc will now be covered in this one Bill for small factories.
  • Employers of such small factories can electronically apply for registration of the factory, notify of the closure, and intimate the authorities of any changes in the ownership.

Deterred by prohibitive expense for filing patents in India?

What are the benefits for startups?

A startup can now select from a list of about 280 facilitators listed on the website www.ipindia.nic.in for the purpose of getting advise on patent regitsration.

In the event a startup is unable to decide on the right facilitator, it can seek assistance from head of office of the appropriate Patent Office (as per jurisdiction) which will suggest 3 facilitators for the startup to choose from.

While the fee for the patent application and other statutory fees payable will be borne by the start-up, the fees for the facilitator shall be borne by the Government.

What is the role of a facilitator?

A facilitator will assist the startup with all steps required for filing a patent application including provide responses to any query raised by a Patent Office, attend hearings, etc. The facilitator will file all required documents to the Patent Office on time on behalf of the startup.

Protecting your Brand

brand label

Like most companies, when we came up with our name, we were convinced that it is an unique name and getting a trademark registration for the same should be a cakewalk! But this was not to be. When we applied for a trademark, the registry raised an objection stating that the name was not unique enough! But how, I wondered! We don’t have generic terms in our name like “bharat” or “coastal”. And we had also conducted a trademark search before applying for the same. Everything was clear. Then how come this objection?

Well, the Trademark Registry can, on its own raise an objection if the name sounds generic. Does that mean, you cannot protect such a name?

Get a Name Availability Search done for Free!

Not exactly! You can always get a little creative. One way to still protect your brand is by clubbing your name and logo and registering the two as a single label. Do make sure your logo is unique. Also, if your logo is a coloured one, then you may consider registering the logo in black and white. How does it help? Well, registering a label in black and white protects the logo and the label from being replicated in any colour as opposed to registering the logo/label in one particular colour, in which case the logo in that colour gets protected, thus exposing it to the risk of being replicated in a different colour.

Therefore, before applying for registration of trademark, check with your trademark consultant on whether you should apply only for registration of the name of your company or logo or both. It is important you take this call before making applications, and spending on registration fees. After all when you are bootstrapping, every penny counts!

Did you know that there is a mandatory 1 year cliff on ESOPs?

CLiff (3)

A cliff or a moratorium is the time period between grant of ESOPs to an employee and vesting of the ESOPs. Under the Indian Companies Act, 2013, there has to be a mandatory one year gap between granting and vesting of ESOPs by companies in India. Why does it matter?

It matters because in most start-ups, the promoters tend to offer ESOPs to employee as part of the compensation in the offer letter. It is one of the primary benefits to employees used by start-ups. However, a promise to give ESOPs in an offer letter is not “granting” of ESOP. The 1 year cliff does not start from the date of the offer letter. An ESOP is said to have been “granted” only once the company has taken steps to put in place an ESOP Policy, such ESOP Policy is approved by the Board and Shareholders of the Company and then the company issues a Grant Letter summarizing terms of the ESOP Policy and specifying the details of the ESOP grant to the employee.

Take a scenario where you worked really hard to get Swati Pandey, a super sharp programmer who has the makings of a future leader onboard your startup, wrestling her away for competitive offers from other companies and startups. Swati joined your company in March 2015 with a promise of ESOPs with 1 year vesting. Swati would, therefore, have been entitled to buy shares against the ESOPs upon them being vested in March 2016. However, like most start ups, you delayed putting in place the ESOP Policy and finally issued a grant letter to Swati only in November 2015. As a result, the vesting of Swati’s ESOP would now get delayed to November 2016. You would ask, why can’t the vesting be accelerated, after all the delay in vesting was because of you, so you should have the discretion to accelerate the vesting. Unfortunately, due to the one year mandatory cliff period under the law, the vesting of ESOP cannot be accelerated to less than a year from the grant of the ESOPs.

It is, therefore, important that if as an employer you are bringing employees on board with a promise to grant ESOPs, do not delay granting of the ESOPs. By doing so, you would effectively be delaying the vesting timeline for your employee, who is anyway working hard for you from Day 1.

Want to understand more about ESOPs? Sign up with LexStart here and get access to our tutorials and FAQs for free.

 

What’s in a name? A lot!

What is in a Name

The first thing I did once we had finalized the name for our start-up was to check if the name was available or if someone had already come up with (what we thought) a brilliant name. When convinced that we actually had come up with a unique name, we proceeded to register it.

We did not wait to register our entity or start the business.

Why in such a hurry? Well your brand/entity name is like your personal name, it’s the identity of your start up. You don’t want to be in a situation where you start with a name, work hard to create a brand and then suddenly midway you have to change it because someone else claims to have the right to use it.

Get a Name Availability Search done for Free!

Heaven forbid, if by that time, your company is profitable and you cannot afford to change your brand name, you may have to shell out a lot of money to get rights to the name. Rights to a name, which became valuable, courtesy your business! I know of a start-up that set up its business, even got enrolled with a prestigious accelerator. At the time of fundraise, the investors insisted on registration of the brand name. That’s when the start-up realized that the brand name they were trading under was already registered to another company. Imagine the pain of rebranding…How do you justify it to your customers, you are anyway in a phase where you are trying to gain their trust and now you have to change your name because of a technicality! Ignorance is not always bliss, you see!

Remember “Intellectual Property” does not mean only a technology or an invention. It also is your brand name or your company’s name. And your priority should be to protect it.

 

Trademark registration cost – INR 6000 – INR 10,000

How to go about it? As soon as you have finalized your name, check on the MCA and IP Registry website, if the name is available. Don’t want to go through the pain of doing it yourself? No problem, just click on this link and leave your details, we will check for availability of your name for free!

Once you have confirmed that the name is available, you can proceed to apply for registration of trademark. Trademark registration can be done online or through a lawyer/law firm or any trademark agent. Registering trademark is not expensive, it will cost you in the range of INR 6000/- to INR 10,000/- per trademark registration (including the statutory fees of INR 4000/-). It is a painless process and requires probably just a couple of hours of your time once you have identified the right consultant!

In my next post, I will share with you some valuable considerations for trademark registrations. Till then, I hope you all have double checked and ensured that you “own” your names!

Term Sheets: To be bound or not to be bound!

In January this year, one of my clients (a VC) came to me with a new investment mandate along with specific instructions to close the deal in 45 days. At that point it looked doable. The company being fairly young (8 months of operations), we did not expect any glitches. The term sheet stage was uneventful. In spite of our repeated requests, the entrepreneurs decided to proceed without a lawyer, assuring us that they are in the process of “shortlisting” law firms and will hire one in time for the binding investment documents. We did not want to take our chances, so we walked them through the term sheet and made sure that the entrepreneurs understood the implication of each and every term. They requested a few changes, and after some back and forth, the term sheet was signed in 10 days.

Continue reading Term Sheets: To be bound or not to be bound!

Starting Up? Then Start Right…

You have a great business idea, have discussed it with friends, family and advisors and now you are ready to start. Well, I am not going to tell you about the kind of entity you should be setting up or how you should go about it. You will find enough write ups on pros and cons of different types of entities. A lot of them will also set up the entity for you for a few thousand rupees. But then what? Just having an entity in place is not enough. Most start-ups think their legal obligations are fulfilled once their entity is set up and that they can just concentrate on getting their business off the ground and probably raise some investments. Well, they are not completely wrong. While it is important to press the accelerator on business, one should simultaneously work on putting in place the right processes and systems, from day 1. Continue reading Starting Up? Then Start Right…