ESOP – An Effective Method for Businesses During Economic Crises

ESOP (Employee Stock Ownership Plan) is an increasingly popular and widely used method in large corporations in Vietnam (such as FPT, Mobile World Group, Novaland, etc.). In addition, if you know how to take full advantage of ESOPs, not only large companies, corporations, but also ordinary private companies will also have their own advantages when using ESOP as an effective method in the current economic crisis. Especially Startup companies, that are in the stage of starting a business in general.

1. Why does ESOP prove effective for startups during economic crises?

In contrast to large corporations, even though “lay-offs” may occur, the remaining workforce remains their motivation to continue committing and contributing to the company. This is due to long-standing cultural values, from supportive compensation policies, or faith in a swift recovery based on the company’s robust economic capabilities. 

However, for startups, the situation is different. These companies are in their early stages, not yet listed publicly, and insufficiently mobilize significant capital like public companies. As a result, startups don’t have the financial resources and the cultural or strong personnel confidence characteristic in this period. Consequently, startups prioritize the utilization of ESOP policies during this phase to incentivize and manage their human capital, for several reasons:  

• Attracting and Retaining Talent: ESOP offers employees the opportunity to invest in and own shares of the company that they work for, understanding its growth potential. Typically, existing shareholders restrict the company from offering shares privately and providing such incentives to new shareholders (affecting anti-dilution rights). This can be able to attract and retain high-quality talent, especially in a competitive startup environment. 
• Increasing Commitment and alignment: ESOP provides an opportunity for employees to become shareholders of the company, encouraging them to bond and align their goals with the company’s growth and concerted efforts to achieve common goals.  
• Cost Reduction: ESOP can be used as a conversion form to pay salaries and bonuses to key personnel in the company. This helps alleviate financial pressure on personnel costs during difficult times. 
• Attracting Investment: Investors often value companies with ESOP programs because they demonstrate a commitment to long-term development and create a positive working environment.  

How should companies implement and issue ESOP to effectively preserve the company’s capital while creating value and motivation for employees? Let’s refer to the following methods of implementing ESOP.

2. Methods of implementing ESOP

• Implementing ESOP as Bonus stock: In this method, the company will issue ESOP to employees based on their tenure, contribution, and current position within the organization. 
• Implementing ESOP to pay salary/bonus for higher-level personnel: In this method, a portion of salary, responsibility allowances, or performance bonuses will be converted into ESOP, with corresponding vesting periods for each salary/bonus payment period. 
• Implementing ESOP as a conversion from reduced benefits: In this method, portions of salaries and bonuses that are reduced during this period will be converted into ESOP for employees. 
• Implementing ESOP as additional preferential share issuance: In this method, the company will offer shares to employees at a discounted price compared to the actual market valuation of the shares. 

Conclusion

As analyzed above, ESOP is an effective method that companies, especially startups, can consider implementing to motivate their employees during the current challenging times. However, the current legal framework in Vietnam lacks specific guidance regarding the issuance of ESOP for non-public companies, except for the Enterprise Law 2020. Therefore, this method remains a relatively complex activity, involving many legal procedures and potential risks that companies need to consider carefully. In this context, companies should consider seeking advice from an experienced consultant to guide them on the implementation process and to prepare suitable plans and documents tailored to their specific needs. 

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