Employee Stock Options & Ownership

Employee Stock Options & Ownership

RXM Advisory Pte Ltd Page 2/11 >> INTRODUCTION With creativity and sheer team spirit, there should be no mission impossible as Henry Ford once said, If everyone is moving forward together, then success takes care of itself. Creating an excellent team that is willing to constantly and tirelessly sacrifice and work hard to achieve endless demanding corporate goals would require the company to commit serious amount of dedicated efforts in energy, time and money to search, nurture and maintain the talent pool and its team attitude that are critical to the success of the company. However, the quality of the team may deteriorate if loyalty is not cultivated and recognised as a core element in the company s culture by the staff. Therefore, the availability of various types of stock incentive schemes are believed to be instrumental to the key elements of a business, viz. Employee Stock Option Plan (ESOP) or Employee Stock Ownership (ESOW) or Management Stock Option Plan (MSOP) (collectively known as Employee Stock Options & Ownership or ESO) are some of the human resource management tools to inculcate and promote the spirit of teamwork and corporate loyalty. This tool allows the employer to exhibit its genuine care and concern for the employees in a tangible and rewarding way.

RXM Advisory Pte Ltd Page 3/11 However, the ESO is not limited for the use in cultivating loyalty alone but also commonly used as an exit strategy for shareholders to enjoy cash out on their equities and at the same time gradually hand over the business to the people whom had helped in building the company instead of selling to external investors whom may not want to continue to run the company with the legacy intact. Properly crafted schemes will increase productivity and reduce manpower turnover and at the same time create reliable and efficient exit route for shareholders to wholly or partially retire from the company in any future time.

RXM Advisory Pte Ltd Page 4/11 >> TYPE OF INSTRUMENTS Smaller businesses operate on tight budgets and are often limited in handing out generous remuneration packages and salaries to recruit and retain talented individuals. ESO is a good way to bridge the gap. It serves as a long term incentive to employees and prevents them from leaving. If the employee leaves the company before the options vest in an ESOP, he has to forego the entire benefit of owning the shares of the company. If it is a growing company and the valuations are increasing, the gain the employee will make is far too attractive to let go. This strategy inculcates a great sense of ownership, thus spurring performance. The ESO offers rewards that can match or exceed the expectations of employees but is still affordable to the company as it is often highly performance driven. Therefore, ESO is basically share allotment mechanism to reward deserving employees and also to materialize the ROI for the shareholders without the need of sourcing potential and suitable

RXM Advisory Pte Ltd Page 5/11 buyers for the business. Some of the various types of instruments of ESO are briefly described as below: 1. Employee Stock Option Plan (ESOP): a. It is an option for the employee to purchase the number of shares at a predefined price that he is entitled to. Hence, under this plan, the employee is granted an option to purchase the company shares but not the actual shares; at least, not yet. However, when the employee exercises the options after the vesting period to acquire the shares, he will actually become one of the shareholders in the company. b. ESOP is commonly awarded with vesting period of 1 3 years prior to permissible share ownership via exercise of stock options. c. If the employee is to purchase and hold on to the shares, thus becoming a bona fide shareholder, he has to pay the company the exercise price of the shares that was pre-determined during the issuance of the share options. d. If the employee is to exercise his right to purchase and immediately sell the shares back to the company (known as exersale ) in order to enjoy the cash out, his gain will be computed as current value of the shares minus the exercise price. In this scenario, the employee would not be required to fork out his own money to purchase the shares. However, transaction or administration fee may apply. e. For non-public companies, the current value of the share price is determined by the annual valuation or NAV (net asset value) of the company. f. A trust may be setup to manage the sale and purchase transactions of the shares to the eligible participants. 2. Employee Shares Ownership (ESOW): a. As opposed to the ESOP, ESOW issues actual shares to the employee without the need for him to pay for the shares granted.

RXM Advisory Pte Ltd Page 6/11 b. Just as with the ESOP, it is also common for ESOW to impose vesting period of 1 3 years before the employee is able to cash out. c. When the employee cashes out his shares, the gain will be computed as total number of shares multiplied by the share price that was pre-determined during the issuance of the ESOW. d. Effectively, the employee will enjoy a higher gain in ESOW as compared to ESOP. e. A trust may be setup to manage the sale and purchase transactions of the shares to the eligible participants. 3. Management Stock Option Plan (MSOP): a. MSOP has the same characteristics as mentioned under the ESOP. b. However, it is only issued to senior management or key staff and is often being issued in addition to the ESOP. c. The purpose of this scheme is to turbo-charge the key personnel to excel above and beyond targeted financial performance by allowing additional stock incentives to be rewarded to them in the following ways: i. Stock Purchase; ii. Stock Bonus; iii. Stock Option; iv. Phantom Stock; v. Stock Appreciation Rights; vi. Combinations of the above.

RXM Advisory Pte Ltd Page 7/11 >> DESIGN & IMPLEMENTATION (1) Preliminary Assessment (2) NAV & Exercise Price (3) ESO Designing (4) Materials Development (8) Completion (7) Implementation (6) Training (5) Trust Setup (Optional) The entire process of designing and implementing the ESO incentive scheme may not necessary follow strictly to the diagram as depicted above; however, the general overview of the process should follow a similar flow of events. 1) In the stage of Preliminary Assessment, vital information will be gathered from the shareholders/management to determine the desired form of ESO that satisfies the implementation objectives, contractual obligations and regulatory compliances. The duration required to complete the process depends largely on the pace of the company in providing complete information. However, the estimated duration for this stage is about 1 to 3 days. 2) Valuation or NAV of the business is to be conducted for the purpose of determining the price per share or Exercise Price of the stock options prior to the structuring and granting of the options or shares. The process of valuation generally consists of information gathering, assessment & analysis, employment of suitable valuation methods, and

RXM Advisory Pte Ltd Page 8/11 valuation computation. The estimated duration to complete and produce the valuation report is about 4 weeks. 3) In the ESO Designing stage, the results from the completion of stage 1 & 2 will be used to structure and formulate the type of instruments and their attached issuance terms to achieve the intended objectives of the incentive implementation. The estimated duration for this stage is 2 weeks. 4) Upon completion of stage 3, Materials Development will produce the necessary documentation and execution tools eg: Stock Application & Sale Form, Administrator Handbook, ESO Circular and FAQ etc to facilitate the proper recording and management of activity transactions and communications for the operation of the ESO. The estimated duration for this stage is 3 to 4 weeks. 5) The purpose of the Trust is to enable communication, transaction, recording and enforcement of all activities relating to stock issuance, stock sales and purchases, and regulatory compliances with the eligible participants. The main roles of the Trust are as follows: a. Ensure timely announcements relating to the ESO scheme;

RXM Advisory Pte Ltd Page 9/11 b. Ensure related correspondences are accurately communicated to the eligible participants to prevent dispute and appeal; c. Ensure proper records are kept for future verification and mandatory reporting to the relevant authorities. d. Enable availability of dedicated communication channel to answer to any ad-hoc queries any time. e. Ensure transparency and fairness in the dealing of the scheme; f. Creation, ownership and management of Trust Fund; g. To enforce regulatory and compliance mandates for punitive measures. The setting up of the Trust is an optional paid service with recurring annual fees by appointing a Trust company to manage the scheme. The estimated duration to setup and implement the Trust is about 2 3 weeks and is usually applicable to larger company with workers union. 6) In the Training stage, key personnel and persons tasked to handle the stock incentive program will undergo a 1 day briefing to familiarise themselves with the program mandates and procedures. Persons from the HR and finance departments should attend the session. 7) In the phase of Implementation, all eligible participants will be identified for the award of the proposed stock incentive scheme. Company announcement could be made pertaining to the imminent issuance of the ESO to eligible participants. The estimated duration for this stage is 1 week.

RXM Advisory Pte Ltd Page 10/11 >> ABOUT US, TIME FRAME & FEE ABOUT US RXM Advisory Pte Ltd is the result of a merger & acquisition exercise in April 2010; with its current physical presences in UAE and India providing services relating to corporate finances in business valuation, acquisition and investment, cross-border advisory, investment deal screening, document generation and investment due diligence etc. We were appointed by EDC@ASME (Sponsored by Spring Singapore), iaxil Singapore Pte Ltd (Supported by Spring Singapore) and IE Singapore as their associated consultant, consulting partner and resident advisor respectively to provide complimentary first level advisory relating to merger & acquisition to many global companies from wide spectrum of industries. We have also been recently admitted as member with the Singapore Corporate Counsel Association in 2011 for duties conducted as in-house legal counsels. TIME FRAME 1. With Trust setup: approximately 12-15 weeks 2. Without Trust setup: approximately 10 12 weeks SERVICE FEE 1. With Trust setup: $60,800.00 (Estimated) + annual recurring fee 2. Without Trust setup: $40,800.00 3. 60% payment prior to commencement of work 4. Final payment upon completion of ESO Circular

RXM Advisory Pte Ltd Page 11/11 CONTACT US RXM ADVISORY PTE LTD 391B ORCHARD RD #23-01 NGEE ANN CITY TOWER B SINGAPORE 238874 TEL: (65) 6832 5921 / 6269 8332 FAX: (65) 6832 8018 EMAIL: general@rxmadvisory.com URL: www.rxmadvisory.com