Employee Stock Option Plan

The Employee Stock Option Plan (ESOP) or Employee Stock Option Scheme (ESOS) is a type of equity compensation granted by companies to their employees and executives. It is a scheme under which companies sell their employees shares by which the employees become shareholders of the company and thus holds ownership of the company at a small level. ESOP is a tool used by a company to retain its employees and get them awarded for being associated with the company. Under this scheme, the employees are granted some rights, called as stock options, to get the shares of the company for free or at a concessional rate, at a predetermined price or the price to be determined on the prefixed method, as compared to the potential market rate.

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Who can opt for an Employee stock option plan?

  1. All the employees of a company can opt for an Employee stock option plan when offered by their organizations and they fit its criteria. Generally, the permanent employees are provided the provision of ESOP's because they are the only ones who will stick to the company for a long period. The reason to do this is that newly startup companies do not have enough money to pay the salaries of the employees. Employee stock option plan has been provided under section 2(37) of the companies act, 2013
  2. The company is benefitted in a way that the startup does not have enough money to pay the salaries of the employees. So they make the employees the shareholder of the company. Moreover, It helps the employer to retain the company and assure a good level of performance in the work

How to apply?

Various steps are required to be done for the allotment of ESOP's to the employees. These are as follows:

  1. Preparation of ESOP policy
  2. Board Approval
  3. General Meeting
  4. Filing of Form MGT-14
  5. Vesting of ESOPs
  6. Allotment of Shares
  7. Issue Share Certificate & Payment of Stamp Duty

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Advantages of ESOP’s

  1. Getting shares from the company they work in gives employees a sense of belonging. They begin to feel that they are not employees of the organization but owners. Also, they can share the profits of the business in the form of dividends and are motivated to work for the best of the business.
  2. Employees become shareholders of the company and hold a small share of ownership in the company.
  3. This gives companies the ability to pay without reducing accounting profits.

Disadvantages of ESOP’s

  1. ESOP could become an obligation for the company over time.
  2. These types of stocks do not have an option premium and the only compensation the company gets is in terms of increased liquidity in its business and savings in certain taxes.
  3. There are also risks of disputes when transferring shares and the value at which the shares must be transferred.


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