MultiSpectra Edge

Saturday, 25 April 2020

DOs and DO NOTs for Civil Engineering Startups

DOs and DO NOTs for Civil Engineering Startups

Dr. Amartya Kumar Bhattacharya

BCE (Hons.) ( Jadavpur ), MTech ( Civil ) ( IIT Kharagpur ), PhD ( Civil ) ( IIT Kharagpur ), Cert.MTERM ( AIT Bangkok ), CEng(I), FIE, FACCE(I), FISH, FIWRS, FIPHE, FIAH, FAE, MIGS, MIGS – Kolkata Chapter, MIGS – Chennai Chapter, MISTE, MAHI, MISCA, MIAHS, MISTAM, MNSFMFP, MIIBE, MICI, MIEES, MCITP, MISRS, MISRMTT, MAGGS, MCSI, MIAENG, MMBSI, MBMSM

Chairman and Managing Director,

MultiSpectra Consultants,

23, Biplabi Ambika Chakraborty Sarani,

Kolkata – 700029, West Bengal, INDIA.

E-mail: dramartyakumar@gmail.com

Website: https://multispectraconsultants.com

In this message of mine to the Civil Engineering fraternity, I have chosen to focus on the DOs and DO NOTs for Civil Engineering startups so that the new enterprise runs successfully. There are certain things which make all the difference between a successful venture and a failed one. Thousands of Civil Engineering startups are established every year; some succeed and others do not.

First, the DOs:

Create a good business plan. This is very crucial. Formulate a sound strategy and vision statement.

Be different. Be clear as to why your business is different and what you can do differently from others. This factor is very important. A startup needs to have an USP ( Unique Selling Proposition ) to ensure that clients are driven to the startup.

Correct mistakes quickly. Give an experiment a maximum time-frame of two years to work. An experiment is a failure if it has been continuing for the past two years and is still not working.

Be strong enough to overcome any hitches that you may encounter during the initial process of establishing your startup and getting it running.

Find the right people. It is very important to partner with people who complement your skills. However, avoid getting too many people on board as it might become tough to find common vision. Ensure that the people you partner with share your values and your vision.

Be flexible. Constantly test your idea in the market and seek feedback. When the feedback indicates that changes need to be made to the original hypothesis, have the courage to modify the original hypothesis without compromising on the fundamental vision.

Meet everyone you hire. This may sound outlandish but do make the effort of meeting everyone you plan to hire for your company. Outsourcing hiring is a big mistake.

Use Information Technology to the greatest extent possible. Sectors like Information Technology are evolving very fast. Use as much of Information Technology in your business as you can. Make sure that you are up-to-date with the latest developments in Information Technology and that you are using it to the greatest extent possible in your enterprise.

Be creative. Be creative in your approach and constantly focus on solving the problems of your clients by innovative approaches. Out-of-the-box thinking is crucial.

Understand that change is the only constant. I, as a Buddhist, know that this is one of the most fundamental teachings of Lord Buddha, emphasised by him throughout his life, and that it is applicable in every situation. Not everything will go as you want and it is important that you realise that sometimes you may have to solve problems that are not of your own creation.

Be research-driven. Be absolutely up-to-date with the latest in Civil Engineering research so that you can offer the best solution possible to your clients. Do a lot of Civil Engineering research yourself.

Learn about the competition. Know who the companies are that you are trying to beat and what are their strengths and weaknesses. Know your enemy is the mantra given by Sun Tzu in the now immortal Art of War. This facet is one of the cornerstones of victory in any battle.

Now, the DO NOTs:

Do not take technology lightly. It is one of the greatest mistakes to ignore technological developments. You run the risk of being outdated.

Do not under-rate commitment as a trait. Specifically, for the initial set of hires, commitment, and resilience, coupled with skills rank way higher up on the scale than skills alone. Sticking with you through the bumpy parts and not jumping ship at the first sign of trouble is an essential quality of a team member.

Do not ignore Open Source software. Using Open Source source software to the greatest extent possible can save you a lot of money. Before investing in a proprietary software, see if an Open Source alternative is available.

Do not ignore marketing. Strong marketing is one of the essential requirements of an enterprise. Reach out to your clients. An enterprise that has a lot to offer can lose out to another having a lesser portfolio if the first enterprise fails to market itself properly. Marketing strategy is a commonly ignored aspect.

Do not think that you are unique if you have merely one or two points, peripheral in nature, different from your competitors. You need to have a significant number of major points different from your competitors in order that you may stand out.

My company, MultiSpectra Consultants, specialises in research-based solutions to Civil Engineering problems. It is absolutely up-to-date in both the latest developments in Civil Engineering research as well in Information Technology. It also does a great deal of Civil Engineering research itself and the outcome of all that research makes its way into peer-reviewed professional Civil Engineering journals. It has carved out a place for itself in solving difficult and critical Civil Engineering problems.

Success in Engineering Management - A Methodical Approach

Success in Engineering Management - A Methodical Approach

Dr. Amartya Kumar Bhattacharya

Chairman and Managing Director,

MultiSpectra Consultants,

23, Biplabi Ambika Chakraborty Sarani,

Kolkata – 700029, West Bengal, INDIA.

E-mail: dramartyakumar@gmail.com

Website: https://multispectraconsultants.com

Abstract

Engineering projects, particularly those related to the development of infrastructure, form a highlighted area in the national economy of most developing countries of the world today. Sadly enough, a large number of these projects do not give the desired result and eventually end up with large cost and time overruns. The reasons for such failures are quite complex and no simple solution is available. Based on the experience of the author on implementation of engineering, including and infrastructural projects in India and other developing countries, he has tried to suggest a methodical approach on successful management of engineering projects.

1. Introduction

An engineering project is a collection of activities linked together to achieve a desired result, has a well-defined purpose focused on the interest and expectation of the end users and it must be completed conforming to the specified quality, time and cost constraints. Such projects are normally complex due to the involvement of people of different disciplines in various departments and locations and have to be flexible enough to accommodate changes as the work proceeds. It involves risk at various steps and the management must co-ordinate and control the whole effort focusing its attention on the desired final objective.

2. Management Strategy

Management strategy is an essential first step in execution of an engineering project. Many projects fail due to the strategy not being formulated at the outset and not being followed through. Hence, it is imperative that the strategy for managing the engineering project must be formulated and laid down during the conceptual planning of the project.

3. Project Phases

The life-cycle of a project broadly consists of four distinct phases. In a real-life project, the phases normally overlap with each other to a large extent. The phases are:

Phase 1: Project concept, survey, site selection, alternative studies, fixing project goals, fixing overall project criteria, possible strategy for design, engineering and implementation, preliminary plans with cost and schedule.

Phase 2: Project development - design and engineering, planning resource utilisation, detailed planning, detailed formulation of project scope, schedule, cash flow, quality assurance and quality control.

Phase 3: Project implementation - organisation, communication within and outside the organisation, implementation plan, monitoring and evaluation, feed-back and follow-up, motivating and leading, identifying, analysing and solving problems.

Phase 4: Project termination - finishing, handing over, settlement of disputes and claims, overall project evaluation and review, contract closure, preparation of as-made drawings, final project completion report for future reference.

4. Project Implementation Stages

The implementation stages in an engineering project mainly consist of detailed project report, contract finalisation, consultant selection, cost estimation, land acquisition, site preparation, setting up of project organisation, procurement of materials and equipment, construction and erection work, installation of equipment and service facilities, scheduling and cash flow, monitoring and control, test, trial run, startup, commissioning and progress reporting.

5. Role of the Management

The main role of the management is to lead, plan, organise, coordinate and control the project ensuring optimum utilisation of available resources, the 4 Ms that is manpower, materials, machineries and money. In most engineering projects, managing the first M, that is, manpower, is the most complex and difficult.

6. Well-Managed Project

The essential factors in a well-managed project are an efficient project team, good team motivation, good leadership and well-defined project objectives. Management shortcomings are frequently noticed on the communication front including language bar, establishment of priorities, follow-up and control. Inattention to the manpower aspect is also common. Many projects fail due to inadequate strategy and control, lack of leadership commitment, ill-defined goals, delayed decision, ineffective planning and resource mobilisation and political and legal obstacles.

7. Engineering Organisation

Engineering management is a team game where each player has to be carefully selected, assigned well-defined duties and responsibilities and each player must play his part well in an efficient and co-ordinated manner. Inter-relationship of staff in the organisation must be well-defined avoiding duplication of responsibility. The organisation must be flexible enough to change depending on the exigencies of the project situation.

8. Team Motivation

The success of an engineering project depends largely on the performance of individual members of the project team. Adequate measures have to be taken to motivate the team members at various levels to achieve the best result. The main motivating factors are, food, clothing, shelter, job security and stability, self-esteem, social recognition, status, position, power, etc. The motivation of a worker depends on the level at which the worker is. The suggested guidelines are:

Bottom level worker- Monetary incentive, accident coverage, etc.

Middle level worker- Security of service, retirement benefit, appreciation, etc.

Top level employer- More power, promotion, recognition, etc.

9. Management and Communication Techniques

Modern management techniques like Work Breakdown Structure (WBS) and Activity Networks (PERT/CPM) must be used to derive full advantage with computerised analysis, reporting and updating. Effective communication is of paramount importance with utilisation of internet, e-mail, computer networking, mobile phones, SMS, video conferencing and other state-of-the-art techniques.

11. Management Software

MS Project and Primavera are the most popular of all the project management software in use today. The software has to be carefully selected keeping in view the specific requirement of the project, ease of learning and application, compatibility with available hardware, cost and possibility of upgradation.

12. Conclusion

Faulty management strategy is frequently the main cause of failure in an engineering project. Fund flow is not the main constraint today. In most developing countries, large projects, particularly in the infrastructural sector, are coming up with internal and external funding. In addition to international funding agencies like the World Bank (WB) and the Asian Development Bank (ADB), the British are funding through the DFID. American, Japanese and German Banks are also funding development projects in third world countries. The major factors constraining successful implementation of development projects are ineffective engineering management, insufficient capacity building and insufficient capacity utilisation. Engineering management in the developing world has to rise to the occasion and play its part properly to ensure successful implementation of development projects.

Geotextiles: An Overview of Applications

Geotextiles: An Overview of Applications

Dr. Amartya Kumar Bhattacharya

Chairman and Managing Director,

MultiSpectra Consultants,

23, Biplabi Ambika Chakraborty Sarani,

Kolkata – 700029, West Bengal, INDIA.

E-mail: dramartyakumar@gmail.com

Website: https://multispectraconsultants.com

Engineering problems may require 'hard' solutions, i.e. constructed facilities having one or more load bearing members, or 'soft' solutions where no load-bearing members are required. Geotextiles are gaining ground in applications in Civil Engineering; particularly in applications where 'soft' engineering solutions are required.

Geotextiles are basically textile materials adapted for use in a soil-intensive environment. They may be natural or synthetic, permeable or impermeable, and their thickness may be in a wide variety of scales. In their varied forms and natures, they may be used for a wide variety of uses, some of which are identified below.

Jute geotextiles, being biodegradable, are ideally suited for guarding slopes against waves in coastal and estuarine environments. The objective here is not to have a slope greater than the angle of repose, it is rather to protect a slope which is constructed at the angle of repose of the soil from degeneration due to waves lapping on it. Over time, the geotextile will be degraded by biological agents but the slope will be permanently protected by the turf growing on it. The geotextile will be permeable, unless coated with such chemicals as will make it impermeable.

In another context, if a point source of groundwater contamination can be identified, the contamination can be contained in a pre-defined zone by using very thin impermeable synthetic geotextiles. This will prevent the contamination from spreading into the groundwater at large. This can be an effective way of isolating the soil in industrial areas from its surroundings. In a certain industry in eastern India, it has been found that the discharge of an effluent into the soil has led to the presence of an abnormally high amount of a cation in the soil which has polluted the drinking water supply in the neighbouring areas. If the effluent is discharged into soil isolated from its surroundings by synthetic geotextiles, then the drinking water in the adjacent areas will not be contaminated. Over time, the soil into which the effluent is discharged will be highly enriched in that particular cation which may then be extracted for some productive use.

Synthetic geotextiles, thin and impermeable, may also be used in hydraulic structures like barrages as impervious seals. They may also be spread on or under the rip-rap typically placed downstream of a barrage to extend the impervious apron by a little greater amount. Should it be desired, they may also be spread over or under a partial area of the rip-rap. In fact, the rigid concrete apron may be shortened drastically and replaced by a sandwich-type construction with impermeable membranes under and on top of a rip-rap layer.

Membrane-like impervious geotextiles can also be used to provide waterproofing solutions. Whether on rooftops, including but not limited to, over expansion joints between two parts of a structure having large lateral dimensions, impervious membranes provide cost-effective waterproofing solutions.

Stronger geotextiles, not necessarily impervious, can be used in conjunction with boulders to protect erosion-prone banks of rivers. Erosion is very common on the concave banks of river meanders leading to meander migration with attendant problems. Boulders piled on the concave side, either in a loose manner or tied by large-meshed wire nets into 'sausages', are commonly used for protection against erosion. These boulders can be wrapped in high-strength geotextiles also to form 'sausages'.

Geotextiles may also be used to reinforce earth and find use in landscaping, particularly in multi-levelled gardens.

Impermeable membranes can also be used in conjunction with retaining walls for the purpose of waterproofing. Box foundations can be effectively waterproofed by such membranes. Such membranes may also find applications in tunnels including for underground railway systems.

Geotextiles can be developed still further in terms of variations in chemical composition, mechanical strength and permeability. New chemical compositions and composite geotextiles, consisting of two or more layers, may be tried. It is possible to have one layer giving strength and another making the geotextile impermeable. The bonding between different layers needs to be given great importance in such cases.

Geotextiles hold out great possibilities. Though they are already being used to quite an extent, space exists for them to be used even more and for more innovative uses.

On Floods in Southern West Bengal, India

On Floods in Southern West Bengal, India

Dr. Amartya Kumar Bhattacharya

Chairman and Managing Director,

MultiSpectra Consultants,

23, Biplabi Ambika Chakraborty Sarani,

Kolkata – 700029, West Bengal, INDIA.

E-mail: dramartyakumar@gmail.com

Website: https://multispectraconsultants.com

Abstract

Occurrence of flood during the periods of heavy shower is quite common in southern West Bengal. The present paper focuses on the flood problem of southern West Bengal, its causes and remedial measures that may be undertaken to alleviate the situation.

Introduction

The state of West Bengal lies in the eastern part of India. The southern portion of the state is flood-prone and floods occur with a depressing regularity. The causes and structural and non-structural measures for prevention and control of floods are discussed in this paper.

Causes Of Floods

A number of factors combine to cause floods in southern West Bengal. There is extremely high rainfall in the monsoon season. The seaward slope of southern West Bengal is very low and the Ganga delta is tidal in nature. There are several low-lying areas where water lies stagnant. There is siltation of several outlet canals reducing carrying capacity. Also, there is human encroachment on some channels hampering renovation of those channels.

Measures That May Be Taken

Quite a few measures may be taken to reduce floods in this region. The network of drainage canals are to be increased and silted drainage canals are to be dredged to augment channel capacity and allow free flow of excess water through those channels. More dykes are to be built to prevent flood water from entering low-lying areas and existing dykes are to be strengthened to prevent their breaching. If possible, human habitation is to be evacuated from flood-prone areas. Pumps of adequate capacity are to be kept on stand-by to pump out water particularly from low areas. Better meteorological forecasting is necessary so that the water levels in the Damodar Valley Corporation reservoirs can be brought down early enough to accommodate high inflows from upstream in flood periods. Adequate discharge channels are to be provided in the lower Damodar basin; this area is suffering from flood due to inadequate discharge channels. The capacity of the Mayurakshi river also needs to be augmented.

Conclusion

Floods in southern West Bengal can be prevented or reduced by taking adequate structural and non-structural measures. The present paper has focussed on these aspects.

On Aspects of Construction of Hydro-Electric Power Projects

On Aspects of Construction of Hydro-Electric Power Projects

Dr. Amartya Kumar Bhattacharya

Chairman and Managing Director,

MultiSpectra Consultants,

23, Biplabi Ambika Chakraborty Sarani,

Kolkata – 700029, West Bengal, INDIA.

E-mail: dramartyakumar@gmail.com

Website: https://multispectraconsultants.com

Abstract

The present paper discusses different facets of construction of Hydro-Electric Power projects. Salient problems and possibilities are touched on.

Discussion

Hydro-electric power projects typically entail construction of a dam, reservoir, power-house etc. in hilly or mountainous terrains. In recent times, low-head power plants and run-off river plants are also being constructed. Planning, designing and constructing a hydro-electric power project involves inter-alia hydrologic, hydraulic, structural, environmental and socio-economic factors. There are quite a number of factors that impede the speedy and successful execution of projects. Some of them are dwelt on in this paper. The problem areas can be divided into different classes and that is done in what follows.

Hydrologic and Hydraulic

Reliable and long-term records of streamflow in the river on which the dam is built as also of precipitation data in the catchment of the river upstream of the location of the dam is important in order to select discharges (floods) of the design and other return periods. Such data is also important in generating synthetic future streamflows by the ARCR ( Auto-Regressive Cross-Regressive ) and ARMA ( Auto-Regressive Moving Average ) models. Lack of data of appropriate quality and quantity would adversely impact on the quality of hydrologic predictions that may be made with an acceptable degree of reliability.

It is also necessary to carry out simulations of seepage out of the reservoir and under the dam. The depth of the basal impermeable stratum at different horizontal spatial locations is necessary in order to fix the position of the lower boundary in the seepage flow domain when solving for the seepage flow by self-developed or commercially available finite-difference and finite-element codes. Sometimes, the basal stratum exists at great depths and its exact location is not known. This would entail judgement in fixing the lower boundary of the seepage flow domain.

Seepage through the body of the dam is of concern in the case of earth dams and accurate evaluation of its amount and delineation of the strategic steps to be taken to reduce this loss of water are extremely important.

Structural

Gravity dams involve massive amounts of concreting. Normal cements have a significant heat of hydration. As a result, if a large portion of the dam is constructed in one stroke, the heat generated is likely to cause significant expansion resulting in cracks. To avoid this, small portions of the dam have to be constructed at a time. This phased construction results in delays and may be avoided if cements having lower heats of hydration without hampering strength are developed.

Dams have large spatial dimensions. Since the length of a dam is large, the earthquake effect on a dam is likely to be such that the movement of different portions of a dam, especially its two ends, are out of phase. This will result in torsional moments being exerted on the middle portion of the dam of a nature that is absent in structures of small areal extent like buildings. In-depth analysis of this phenomenon is needed to design dams more resistant to cracks in times of earthquakes.

Research is needed in quicker and more mechanised modes of construction. This is needed as faster construction will result in a lower gestation period of the project and thereby increase returns. Also, it may not be permissible to close a stream for a prolonged period in view of the irrigation and drinking water needs of the people downstream.

Managerial

Intense and effective communication between design engineers in the design office and the construction engineers at site is necessary to evolve designs and construction practices which are mutually supportive. This would preclude, among other things, the necessity to revise designs which may be found inappropriate from the view of prevailing construction practices.

The rehabilitation of people whose homes are going to be submerged by the reservoir is another issue testing the managerial abilities of technical personnel as sometimes vested interests interfere and complicate what is otherwise a solvable socio-economic issue.

Conclusion

The paper raises some issues related to construction of hydro-electric projects. More efficient construction involves better solutions to the individual problems and also to the interdisciplinary factors.

Environmental Impact Assessment with Special Reference to Water Resources Projects

Environmental Impact Assessment with Special Reference to Water Resources Projects

Dr. Amartya Kumar Bhattacharya

Chairman and Managing Director,

MultiSpectra Consultants,

23, Biplabi Ambika Chakraborty Sarani,

Kolkata – 700029, West Bengal, INDIA.

E-mail: dramartyakumar@gmail.com

Website: https://multispectraconsultants.com

Water resources projects occupy an important place in the development of any country. A project has certain environmental impacts, which must be considered during the planning of the project. The development of a country is primarily considered to be based on economic parameters like gross national income, per-capita income, etc. However, in doing so enough weightage is often not given to environmental parameters of a country. Economic development that damages the environment is not desirable because such economic development is not sustainable. We can explain what sustainable development is in a few words. Sustainable development basically means that if our succeeding generations could be a party to the decision that we make today, they would agree to it.

To ensure sustainable development, the development must enhance the quality of the environment and if it not possible to do so, it should at least ensure that the environment is not degraded. In the context of water resources development, what does the word environment mean? Environment includes water, soil, flora, fauna and of course human beings. There has been a debate as to whether human beings or nature should be at the heart of environmental impact assessment. There are some people who believe that nature should be at the core of environmental protection activities and should be protected to the greatest possible extent. There are others who believe that human beings should be at the core of environmental protection and a project should enhance the quality of human life in ways other than economic.

It can be said that there is a hierarchy with human beings at the top, the environment in the middle and water at the bottom which means that water can be considered to be only a component of the total environment and environment is only one of the factors that make up the quality of human life. Environment Impact Assesment (E.I.A.) is a term generally used to asses the environmental impact of any project. For example, the construction of a high dam will result in creation of a large reservoir which will submerge forests, wildlife, villages and agricultural land. The proper rehabilitation of the affected villagers is an important aspect of dam construction. Similarly flora and fauna have to be preserved and if there are historical monuments within the submerged area, they have to be properly rehabilitated elsewhere.

It is often believed that development and preservation of the environment are in conflict but it need not be so. There is an example in the Midnapore district in West Bengal where a project, originally meant for flood control, has given rise to a beautiful lake which can be developed as a tourist spot.

Another question that is relevant pertains to as to when the E.I.A. should be conducted. One approach may be to conduct a cost-benefit analysis of the project based on economic considerations alone, and only if the project is feasible from economic considerations to go in for an E.I.A. Another idea is to conduct an Initial Environmental Examination (I.E.E.) at the time of initial planning of the project, thus embedding environmental considerations into the project conceptualisation. The I.E.E. need not be a very elaborate affair but may merely take into account the probable environmental impacts of a project in a loosely defined way. Another question relates to whether the group conducting the economic analysis should also conduct the E.I.A. or whether an independent group should be entrusted with the job of conducting the E.I.A. to eliminate any possibility of bias.

E.I.A. has been conducted for diverse cases. In Germany, E.I.A. has been conducted on the project of doubling some lock gates on the river Moser which flows past Metz in France and joins the river Rhine at Koblenz in Germany. In India too, E.I.A. has been used in numerous situations in water-related projects.

The environment is one of the key factors affecting the quality of human life. The floods in Kolkata of 1978 are still fresh in the minds of many people. Faulty urban drainage was one of the causes of that flood because storm water which flows in Kolkata from West to East was unable to drain out properly due, in part, to the rapid urbanisation of Eastern Kolkata. E.I.A. needs to be done before embarking on a planned expansion of a city, not only with regard to urban drainage but also with respect to other environmental factors affecting city life.

All said and done, E.I.A. is not a panacea for all environmental problems. Some environment-related problems may remain in a development project in spite of E.I.A. being carried out. However, E.I.A. can go a long way in enhancing the environment-friendliness of a project.

Saturday, 4 April 2020

Employee Stock Options for Startups

Employee Stock Options for Startups

Dr. Amartya Kumar Bhattacharya

Chairman and Managing Director,

MultiSpectra Consultants,

23, Biplabi Ambika Chakraborty Sarani,

Kolkata – 700029, West Bengal, INDIA.

E-mail: dramartyakumar@gmail.com

Website: https://multispectraconsultants.com

The emergence of Startups has also heralded the new age of employee compensation structures. Startups are innovative ‘by-default’ and their creativity also extends to the sphere of how their employees are compensated. This includes overcoming cash constraints while hiring the best talent the market (Indian or Global) has to offer. How do Startups manage to hire and retain top talent despite lack of cash resources? The answer is ESOPs or Employee Stock Option Plan.

None of you are strangers to this term; ESOPs are actively deployed by Startups to achieve twin objectives (a) hiring the best, and (b) retaining the best for long periods of time. Of course, ESOPs also make the employee part-owner of the Startup. Thus, the emotional connect to the Startup is much higher vis-a-vis full cash compensation. ESOPs represent the collective faith of the Startup’s talent pool, in the business that they are co-creating. The benefits of ESOPs are immense - thus, it is important for any Startup to know its finer details.

Allotment of ESOPs

ESOP can be formulated by companies. Most Startups are Private Limited Companies and are governed by the Companies Act 2013. The Act permits the allotment of shares to employees of the Startup (or its holding or subsidiary company), under an approved ESOP, at a future date but, at pre-determined value. The ESOP should be approved by at least 75% of shareholders of the Startup. Pre-determined value could be the face value of the shares. For example, a share, whose market value is Rs. 1,000 could be made available to the employee at Rs. 10. The benefit to the employee, of course is the difference, which in this example is Rs. 990 per share. This could be of sizeable value if the employee owns a small percentage of the Startup’s capital. It is this difference that compensates the employee for the faith invested into the idea in the Startup’s initial days.

The other question we need to answer is whether shares under ESOP can be given for free. There are two opinions - one, that the benefit of discounted value is reserved for ‘sweat equity’ shares - a concept that is legally different from ESOPs; and two - that pre-determined price could mean discounted value as well. The former would be a conservative stand and the Startup should take an expert’s advice before deciding on the price.

Are ESOPs taxed?

Stock options are taxed. The next question is ‘What is taxed?’ The benefit accruing to the employee is taxed. In the example, Rs. 990 would be subject to tax. The trigger is the date of the exercise - we shall look at this in a while. The Income Tax Act 1961 states that the difference between the market value of shares ( determined by a Merchant Banker ) on the date of the exercise and the pre-determined price the employee pays to acquire it would be taxed as ‘perquisite’.

The tax shall be paid on slab rates. Further, on the date of sale of shares acquired under ESOP, capital gains tax is payable on the difference between selling price and the market value adopted for perquisite tax calculation.

The advice to employees would be to defer exercising the option to buy shares to a date when the shares can be converted to cash. Else, there could be large tax outflows. Shares of private limited companies are not traded on a stock exchange or in the stock markets. Thus, they cannot be easily liquidated. If the option is exercised, the employee could very well end up paying tax on a non-cash ( and in some cases, a non-existent ) benefit. Further, it is the responsibility of the Startup to deduct tax on salary paid and benefits made available to employees; the Startup could encounter a situation where the cash component of the salary is not sufficient to pay taxes on non-cash perquisites. Thus, it is very important to structure the ESOP correctly.

The Mechanics of ESOP

Stock Option, as the name suggests, is an ‘option’ to buy the underlying asset, which is a share of the Startup. There is no obligation on the employee to buy the shares; it is only an option which the employee may or may not exercise. Every ESOP will have the following components;

Grant Date

The date on which the option is granted by the Startup to the employee. Grant is a formal action taken by the Startup and the employee is informed of the entitlement by way of a Grant Letter

Vesting Period

The minimum period that the employee has to serve to be entitled to the stock option. The average vesting period ranges between 3-5 years. Most Startups tranche out the total entitlement. For example, if the employee is entitled to 100 options and the vesting period is 5 years, the following two scenarios are possible:

Equal vesting, i.e. 20 options for completing every year of service, or Milestone based, e.g. 12.5% at the end of 1st and 2nd year, 25% each at the end of the 3rd, 4th and 5th year

Exercise Period

The period post vesting, during which the employee can exercise the option to buy the shares. ESOPs can also be structured to address the eventuality of the employee leaving the company during the exercise period

Exercise Date

The date on which the employee exercises the option to buy the shares

Exercise Price

As seen above, the pre-determined price at which the employee will buy the shares

Every ESOP is a play of these words and, thus, thorough understanding is crucial for the Startup and the employee

Finally, in addition to drafting an ESOP that is compliant with law and is tax efficient, the Startup should;

Create a viable and easy to govern stock option structure, which could include establishing an Employee Stock Option Trust, funded by the Startup

Ensure compliance with Foreign Exchange Management Laws when the ESOP is of the foreign parent company but can be accessed by Indian employees,

Ensure booking all costs on the profit statement each year, in accordance with Indian GAAP, e.g. the Guidance Note on Employee Share Based Payments, which will in most cases apply to Startups

Educate the employee on the stock option plan and guide them, where necessary. Remember, that ESOPs are benefits extended to employees and their interest is paramount

Wishing you the very best!