Employees are the backbone and foundation of any business. To help attract, motivate and retain the best possible talent, companies will apply different strategies, one of which is ESOP.  If you’re hearing (or in this case, reading) about this option for the very first time here, have a look below for more information on the topic in general, and how ESOP works in Latvia, specifically.  

What is ESOP?

ESOP is the shorthand way of referring to an Employee Share Options Plan. This is a benefit scheme that offers employees the opportunity to obtain shares of the company at a specified price.

At the time of agreement, the shares are not yet transferred to the employee, they are just offered the option of obtaining them after a predetermined vesting period. A vesting period, in this case, refers to the amount of time the individual must be employed at the firm before they are able to exercise their options (Henrick, 2020). 

This is a fantastic way to help employees feel a sense of ownership, motivate them to stay with the company for longer, and give them a chance for additional monetary gain. If things go well and the company continues to prosper, there are great benefits to be reaped by employees that agree to the ESOP and contribute their best work to the company.

How do share options work? 

To put it simply, an employee is offered a specific amount of options, which after a specific amount of time (called the vesting period) can be exercised into legitimate company shares. The price the employee will pay for them is predetermined at the time of offering. Once the vesting period is over, the employee has the opportunity to buy those shares at the employee exercise price rate. The shareholder then gains partial ownership of the company, as well a proportionate claim to the firm’s assets and profit (Hayes, 2021). They can at a later point sell these shares on the market for a higher price. 

It is worth noting that, if the employee leaves before the end of their 1st year of employment, or is terminated from the company for breaking rules outlined in the employment contract, their share options will be lost. However, if the employee leaves on favourable terms after the vesting period is complete, they may have the opportunity to exercise their share options within an agreed window of time after leaving. 

How does ESOP work in Latvia? 

Each country has their own set of laws when it comes to ESOP (IndexVentures, n.d). Nordigen is registered in Latvia, therefore the local set of regulations apply. 

In January 2021, rules in regard to ESOP schemes in Latvia were amended to become more generous to employees. The changes include the potential to offer employees not only stocks in public limited companies, but also shares in private limited liability companies. The vesting period has also been shortened from a minimum of 36 months to 12 months in order to apply exemption from salary taxes when granting options to employees.  At the time of sale,  if all requirements are met, only capital gains tax (currently 20%) is applied on the difference between the sale and exercise price (IndexVentures, n.d). 

While in the past, ESOP schemes were typically limited to large organisations with international ties, nowadays, Latvian start-ups are also starting to offer this type of plan. This gives them the chance to help integrate early employees into the company, give them options for more control, bigger wins and more substantial contributions. In the longer term, this practice creates more potential for greater monetary gain and gives employees the foundation and funds to become entrepreneurs in their own right in the future. 

References

Arbidane, I. (2021, March 30). From 2021 Latvia has one of most attractive tax regimes for employee stock options 2/13/21. MindLink. https://mindlink.lv/from-2021-...

Cleartax. (2021, March 12). ESOP – The employer perspective. Cleartax. https://cleartax.in/s/esop

Cothern, L. (2021, September 8). What Should You Do with Stock Options When Leaving a Job? MyBankTracker. https://www.mybanktracker.com/...

Harroch, R. (2016, February 27). https://www.forbes.com/sites/a...

Hayes, A. (2021, May 31). How Does the Stock Market Work? Investopedia. https://www.investopedia.com/a...

Henricks, M. (2020, September 17). What Is a Vesting Period? Smartasset. https://smartasset.com/financi...

IndexVentures. (n.d.). Rewarding Talent: A guide to stock options for European entrepreneurs. IndexVentures. https://www.indexventures.com/...

Novicka, S. (2020, November 30). Employee Stock Options in Latvia – Spring is in the Air. Cobalt. https://cobalt.legal/en/news-c...