The abbreviation of ESOP is Employee Stock Option Plan, this concept has grown very recently in India with the outbreak of the dynamic startup ecosystem in India. This is a plan to build up a talented and effective team. Nowadays with the emergence of the startups the talented and the high-performance employees are expecting more facilities and benefits than just the salary. There is a change in the work culture and mindset of people which is to attract talent and retain it for longer period of time. Employee Stock Option Plan(ESOP) or the Employee Stock Option Schemes(ESOS) are the new tools to build up a talented team of professional which benefits the business.
It is an option which is provided to the employees of a company to purchase shares of the company at a future date but in a pre-determined price. The ESOP gives the right to an employee for purchasing the share in the company at a pre-determined price but for a certain number of years. There is, however, no obligation on the employee.
There is a format of this plan which begins with the issuance and ends with exercising of the Option, the steps are as follows;
A talented employee is hired on a monthly salary and over that ESOP is applied to buy a thousand shares of the company after a period of one year at a price of Rs. 1000 each.
This option is exercised only after a year when the employee becomes authorized with the company.
A private equity firm after two years values the shares of the company at Rs. 10,000 each and invests about USD 1 Million.
Once authorized and given the right for the shares , the employee can excise/surcharge his option to purchase upto 1000 shares of the company valued at Rs. 10,000 where each is for Rs. 1000. This will help the employee in making huge financial gain out of the company other than his/her monthly salary.
It is not mandatory but yes it has its own benefits and importance in financial gain. To meet upto today's business forum, it is an advanced option for recruiting high performers in the team. This idea of this plan in business is implemented to align the interest of the employees with that of the shareholders.
ESOP provided to the employees based on the following;