ESOPs/SARs Structuring as a Great Cash-Saving Instruments

An unlisted JV company in telecom tower infrastructure development had 2,000+ employees. The Promoters were progressive and were exploring ways of saving cash without marring the employee benefits. The entire employee population was initially thought to be covered.

There were key challenges as to

(i) appropriate instrument selection (i.e. ESOP, RSU, or SAR-Equity, or any combination thereof) mainly from equity dilution, accounting cost, administrative ease perspectives,

(ii) employee coverage (whether 100%, 75%, or 50%) to start with,

(iii) what % of CTC should be through equity to start with,

(iv) being unlisted, structuring of liquidity events with buyers other than the company, and (v) appropriate employee communication to get their buy-in.

A detailed sensitivity analysis was done basis which two instruments were chosen - one for the top management and another for others which effectively managed equity dilution and prescribed different exercise prices. Equity instruments are granted in lieu of a small % of CTC to start with. Lower exercise price was considered for employees other than top management. Promoters committed for buy-out if there is no purchase by external investor or IPO.

That was a good start.