Employee Stock Options Valuation ESOP in Singapore— An Overview
If you have just started your business in Singapore, you must be in search of top talent to take your startup to next level and attain the heights of business valuation. It becomes difficult to compete with other well-reputed companies in terms of employee compensation to sustain high-quality talent with frequent additional incentives.
Nevertheless, young companies and startups employ adopt ESOPs, Employee Stock Option Plans to offer ownership interest in the company to their employees. This form of remuneration plan allows the company to incentivize its employees without causing much strain on its business cash flow. This article will provide a holistic understanding of what ESOPs are, what benefits it entails, and what factors should you consider during the entire process.
The Employee Stock Option Plans provide an opportunity for the employees to acquire a share of their employer’s company. These plans are, usually, set forth by the Board of Management, and administered by the Board of Directors of a company. The former sets the exact exercise price for the ESOPs while keeping it as close as possible to the fair market value of shares.
For ESOPs to remain as one of the methods of employee compensation, the companies fix a percentage of total shareholders’ equity to be allocated for this purpose.
Developing an ESOP in Singapore
To develop an effective and efficient ESOP in Singapore, it is quite critical to take into consideration the organization’s financial position, its entire process of business valuation, and overall company requirements and objectives.
Furthermore, it is equally significant to gauge how you would remunerate employees in line with the market norms, what amount are you willing to allocate for employee stock options, and finally consider the total number of stock options you will be offering to your employees.
Typically, a typical ESOP for Singaporean companies should include the following:
- Vesting Period: It is the amount of time an employee must wait and work for the company until they become fully capable of exercising their option. It is usually up to 3 or 4 years.
- Cliff or Lock-in: It is the minimum amount of time that an employee must stay employed in a company to start earning vested interests or share options. Most companies have a cliff of at least 1 year.
- Conditions to Sell: An ESOP agreement may include clear restrictions to sell Employee Stock Options for a specific period of time.
A vesting schedule shows the amount of time required for employees to remain in a company to be eligible to exercise their stock options. Whereas, the cliff vesting period shows the minimum amount of time an employee must work in a company to be able to become eligible for a grant of stock options. A cliff period is followed by the vesting period.
If any member of the ESOP agreement decides to quit the company during the Cliff period, they do not receive stock options because they are not eligible for getting any in that period. However, if a member decides to leave the company during the Vesting period, they are eligible for being compensated stock options according to the length of their employment because they have already gone through the Cliff period, becoming qualified to start earning their vested interest.
Valuation of ESOP in Singapore
When valuing ESOP , professional valuation providers would tend to adhere to established reporting standards such as the International Financial Reporting Standards (IFRS). Our valuation practices abide closely to the Singapore Financial Reporting Standards (SFRS), which are substantially converged with the IFRS.
IFRS 2 defines the financial reporting by an entity when it undertakes a share-based payment transaction. The entity is required to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.
Whilst ESOPs can be valued under the three main valuation approaches (income, market and cost), the more commonly used approaches are the income and market approach. As every company is different, there should be professional judgement when assessing the appropriate method(s), capitalization rates, discount rates and other variables when valuing ESOP in Singapore.
We specialize in providing valuation of employee stock options and various other forms of deferred compensation methods. Read here on the top 7 guidelines to keep in mind when using ESOP in Singapore.
If you are looking to get a valuation of your stock options, or are confused with the intricate process of employee stock option plans valuation, contact us today.
