An ESOP scheme using call options will typically go through these key stages.
1. Grant
The company offers you a grant of options by sending you the company ESOP Rules (or Deed) and an offer letter containing:
- The amount of options being issued
- The exercise price
- The vesting period and conditions or criteria
- The expiry date
You need to sign and return the offer letter to confirm your participation in the ESOP.
2. Vest
When the options vest you have the right to exercise your options and convert them into shares. While your options are in an unvested state they cannot be exercised.
Vesting normally takes the form of:
- Automatic time-based vesting and/or
- Manual/Performance-based vesting
Automatic time-based vesting
The options vest gradually over a period of time, generally monthly, quarterly or yearly. A vesting cliff may be used. Under a cliff a certain amount of options vest after an initial period has passed. For example, one year's worth of options will only vest 12 months from the start of the ESOP grant.
Manual/Performance-based vesting
Options will vest on the achievement of some defined milestone or performance hurdle. If the options don't vest (for example, because the milestone is not achieved), they lapse. Lapsed options are recycled back into the company's option pool and are no longer available to you.
3. Exercise
Exercising is the process of converting vested options into shares. You notify the company of your intention to exercise your options, complete an Exercise Notice and purchase the shares at the exercise price detailed in your offer letter by transferring the amount into the company's bank account.
The shares are issued to you and you officially become a company shareholder.
Note: Exercising options has tax implications. Make yourself aware of your tax liabilities by consulting with an accountant or tax advisor.
4. Sale
Sale of your shares may be possible at a share trading event, privately by arrangement or at a liquidity event.