Employee Share Ownership Plans (ESOPs) are an increasingly common tool for Kenyan tech startups and growth companies to attract, retain, and align the incentives of key employees. The legal framework is found in the Companies Act 2015, the Employment Act, and the Income Tax Act.

Structure: Options, Warrants, and Direct Grants

A share option gives the employee the right to purchase shares at a fixed exercise price within a defined period. A share appreciation right (SAR) gives the right to receive the increase in share value without purchasing shares. A restricted share grant directly allocates shares to the employee subject to vesting conditions.

Vesting

A standard vesting schedule is four years with a one-year cliff: no options vest in the first year, 25 percent vest at the one-year anniversary, and the remaining 75 percent vest monthly over the following three years. Acceleration provisions, whereby unvested options vest on a change of control, are a common employee request.

Legal Documentation

An ESOP requires a plan document, individual grant letters, an amendment to the company’s articles of association reserving a share pool, and a board resolution approving the plan and each grant.

Tax Treatment Under the Income Tax Act

The benefit received by an employee from exercising a share option, calculated as the difference between the market value on exercise and the exercise price, is treated as employment income subject to PAYE. The company must account for PAYE on this benefit. Capital gain on a subsequent disposal is subject to capital gains tax.

ESOPs in Listed Companies

For NSE-listed companies, ESOPs are subject to CMA regulations and NSE Listing Rules requirements for disclosure and shareholder approval. CMA regulations prescribe the maximum percentage of share capital that can be reserved for employee share plans.

Setting up an ESOP for your company? Contact Clay & Associates Advocates for specialist advice. Book a Consultation