Employee Share Option Schemes in Malaysia: An Overview
Attract & retain the best talent with an Employee Share Option Scheme
If you want to…
- Attract talent and keep high performers
- Turn employees into valued partners with an ownership mindset
- Increase your cash runway and reduce cash burn
- Reward your team upon an exit event
Implementing an Employee Share Option Scheme (ESOS) might be one of the most important things you can do to achieve these outcomes.
What is a ‘Share Option’?
Share options, also known as stock options, are a form of equity compensation that provide employees with an opportunity to score a big pay day when they’re eventually exercised and sold.
Aside from often being one of the most valuable incentives you can offer, share options allow your employees to participate in the company’s growth without needing to spend more of your precious cash.
If you’re considering creating a compensation / reward plan that includes ESOS, it’s important to know how they work in Malaysia. Malaysian labour laws, company laws, securities laws, listing requirements, EPF implications and tax laws are some of the things that need to be carefully considered when customising your Employee Share Option Scheme.
As lawyers who specialise in Startups and VCs, we can help you navigate Malaysia’s ESOS laws and plan out the key features of ESOS that suit your company and specific situation.
How do Employee Share Option Schemes work?
Share options are contracts between your company and the participating employees.
These contracts give an employee the right to buy (exercise) a number of company shares at a predetermined price (exercise price), thus allowing them to own shares in the company.
But before employees can exercise their right to buy shares (share options), there is a prescribed length of time they must work for the company or a certain set of conditions that has to be met (vesting). This is important because it gives more incentive to stay with the company and perform well during this vesting period.
Once the options are vested, they can’t wait forever though. There is a set amount of time (exercisable period) before these share options expire. That also includes a specific period of time after an employee leaves the company.
Employee Share Option Scheme Malaysia: A case study
One of the best ways to understand ESOS is by following a timeline.
- Company XYZ Sdn. Bhd hires Sarah as an employee.
- As part of her employment package, XYZ grants Sarah options to acquire 5,000 shares of XYZ’s stock at 10 sen per share (the fair market value of XYZ’s ordinary shares at the time of the grant)
- The vesting period is purely time-based with a 1-year cliff and a 3-year vesting period. That means Sarah needs to stay employed with XYZ for one year before she can exercise 25% (or 1,250) of the options. She then vests the remaining 3,750 options over the next 3 years of employment, in equal monthly intervals.
- If Sarah leaves XYZ in her first year of employment, she is not entitled to any of the options.
- After the options are vested or becomes exercisable, she can buy the ordinary shares at the agreed 10 sen per share (even if XYZ’s share value has increased significantly)
- If after 4 years Sarah is still employed by XYZ, all of her 5,000 option shares become vested.
- Now picture this: One day XYZ goes public, and its share value is now RM10 per share.
- Sarah exercises her options and buys 5,000 shares for just RM 500 (5,000 x 10 sen)
- She then sells her 5,000 shares at the publicly traded price of RM10 = RM 50,000. Sarah has made a gain of RM 49,500.
Key ESOS Terms To Know
Share options should not be confused with the underlying shares. If someone owns shares, they are immediately a shareholder in the company with voting and dividend rights. If someone has share options, they have the right to buy shares in the future, and are not yet shareholders until exercise happens.
Also known as ‘offer date’ or ‘award date’. The official date when the options are awarded to the employee and when the vesting period starts.
Common vesting methods are either time-based, milestone-based (e.g. meeting KPIs) or a combination of both. A vesting period is a period during which employees won’t be able to exercise the options. For example, the terms of an ESOS could state that the options will only vest if:
- The company achieves an annual turnover of RM100m, and
- The employee is still employed for a certain period. The longer the employee works for the company, the more options they are awarded, for example: 25% of the options may vest after the employee has worked for a year, and the other 75% awarded over the next 3 years of employment in equal intervals.
Offer Price / Exercise Price
The price per share the employee must pay the company in order to purchase each share under the employee share option scheme. For example, 5,000 shares at an exercise price of 10 sen per share means the employee pays the company RM500 to subscribe for 5,000 shares.
Once the vesting period is up, the employee has the right to exercise the options. Exercising that right means they buy actual shares from the company, at the agreed exercise price during the grant. An employee doesn’t have to exercise vested options, but they certainly can if they want to.
Key factors to consider when designing my ESOS?
Download our ESOS Checklist
Creating a win-win offer
It’s important to begin by understanding why it’s beneficial to offer share options.
For the company, it’s an effective way to attract talent, align them to company stretched goals, reward them collectively and possibly to reduce cash burn.
For employees, it’s a way to receive compensation that could have a tremendous upside value and aligns their financial outcome with the future and performance of the company.
By now you should have a basic understanding of how ESOS works. How you decide to create an attractive offer that includes an ESOS will depend on your company’s circumstances.
At Donovan & Ho, we’ve helped numerous companies plan out their ESOS. We can help with:
- Advising on pros and cons of different types of equity incentive plans
- Designing and structuring the plan according to your company’s preferences
- Drafting customised legal & incidental documents under the plan
- Advising on legal regulatory and compliance under Malaysian laws
- Attending to initial tax filings upon launch
- Providing live training to management or participants