Employee Stock Option Plan
Updated: Aug 22, 2021
Employee Stock Option Plan also known as ESOP's are allocated by companies to their employees either as a part of pay check or incentive. ESOP's are mostly allocated in India by Startups, Bootstrapped companies and by some major Tech firms and MNC's.
For Startups it is a good strategy to cut down on the hiring cost for Senior Level Executives employees by making ESOP's as part of the paycheck. Apart from paycheck, companies might also issue it as part of incentive or rewards to their employees.
Through ESOP's an employee can own equity shares of the employer company over certain period of time. The terms are agreed upon between the employer and employee during the issuance. The employee would only able to earn the profits of ESOP's once they have been bought back by their employer post their vesting period or earlier than that.
Are ESOP's a good option ? The rules and regulations regards to ESOP's are tricky, they are certain conditions that have to be met before an employer can gain the capital on the shares. Such as an employee might not be able to redeem the ESOP if he leaves before the vesting period and there is no obligation that a Employer has to exercise his right to buy back the shares post the exact period of time as such.
When an employer had issued ESOP's to the employee, there should be a letter of certification or a document regards to the agreement on the terms which the ESOP's were allocated to the employee.
An ESOP's agreement would contain the following details.
Grant Date: The date of agreement between the employer and employee to give an option to own shares
Vesting Date: The date the employee is entitled to buy shares, after conditions agreed upon earlier are fulfilled. This date is also the agreed-on grant date.
Vesting Period: The time period between the grant date and vesting date.
Exercise Period: Once stocks have ‘vested’, the employee now has a right to buy ) the shares for a period of time. This period is called exercise period.
Exercise Date: The date on which employee exercises the option to buy back the share.
Exercise Price: The price at which employee exercises the option.
In terms of Taxing, they are taxed at two instances.
When going for an ESOP's option always check on the conditions of the agreement and the time of renewal period. Also scenario's in the past where the companies had honored the agreement as such.