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ESOP myths | Myth #2: ESOP rules are too complex for managers

ESOP myths | Myth #2: ESOP rules are too complex for managers

In the first part of the ESOP myths series, we focused on the myth that employee stock ownership plans (ESOPs) are too complex from the perspective of founders and shareholders. It is true that the ESOP issue is robust and complex and can feel overwhelming. Shareholders and managers may often believe that it is not easy to choose the right solution to best meet the needs of their corporation and to really aim at the long-term employee motivation. But as you are about to discover, we can assist you effectively in addressing these concerns.

What is important in the whole ESOP story is the approach of the founder (shareholder) whose interests and goals, as well as willingness to let managers and employees have an ownership interest or shares in the company, will be crucial to the ultimate shape of the ESOP. In addition, the managers might be concerned that they do not have sufficient legal, economic or tax knowledge to evaluate the ESOP well enough and to see whether, why and how they will benefit from the ESOP, and what it means for them in the long term.

Choosing the right form of ESOP

The selection of the final form of an ESOP is the intersection of many interests – those of the corporation (to ensure its long-term sustainable profitability), of the founder (who would need to waive certain rights or values in favour of the managers/employees), and of the managers. The managers must clearly understand what benefits an ESOP can offer them, how to achieve those benefits, and how to apply and keep its various mechanisms viable. Quite logically, it might be often difficult to understand all of these aspects.

However, the impression that ESOPs seem initially complex can be dispelled very quickly. ESOPs have been known in corporate law for decades. Usually, there already is a standard solution that meets the requirements of all the stakeholders concerned, and that can only be adapted to meet the given corporation’s needs as accurately as possible. 

Since we, at HAVEL & PARTNERS, have more than 20 years of practical experience with ESOPs, we can advise you whether it is appropriate for your situation to choose a simple form, for example, by merely modifying the director service agreement to enable phantom shares, or choose a different form of debt or equity securities.

ESOP implementation and proper communication

When the right ESOP setup is selected and the related documents prepared, the work isn’t over. The founders and co-founders may often be concerned about whether they will be able to correctly explain and implement their chosen solution so that it is truly functional, clear to its addressees, and meets the defined objectives. 

Therefore, ESOPs not only need to be set up correctly, but also sufficiently explained. Any potential questions must be answered, and ambiguities clarified. At this stage, effective communication is essential, as failure to explain your ESOP can lead to many misunderstandings, mistrust, and disillusionment with your plan. As a result, an ESOP may not bring about many of its benefits, which you may have read about previously in our other series on ESOPs, for example here.

Our law firm can be the right advisor and partner both for selecting and setting up the suitable ESOP as well as for the implementing stage and the rest of its “life”. We can assist you in kicking off your ESOP and explaining it clearly to your managers and/or employees. We can also continue to be available to provide explanations and answers to any questions that may arise in relation to ESOPs. This phase must aim at explaining all the benefits in a sufficiently specific and understandable way to ensure that the motivational objective of the ESOP is achieved.

For this purpose, we, at HAVEL&PARTNERS, are ready to present the selected solution, highlight its strengths and rules so that every manager and employee knows what to do on their own to achieve the greatest possible benefits. Of course, follow-up seminars and manuals are also provided to ensure that the corporation can manage the ESOP itself in the future, or with minimal external assistance only.

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