The ESOP Guide | Part 1 Types of ESOPs

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Types of ESOPs

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The next big target for the Indian startup ecosystem would be to reach $25 trillion by FY 2025. The government has put forth several initiatives to reach this goal and to also make the startup space a mass job creator. After all, India has the world’s third-largest startup ecosystem according to NASSCOM. 

However one of the biggest challenges that human resource recruiters face in the startup world is that very few B-school graduates wish to work for startups that are not MNCs. Employee Stock Options (ESOPs) have become a common solution to employee incentive programs in order to attract the right talent.

ESOPs are rewards given to eligible employees in equity stakes or a cash payout. This is typically made part of the employee’s pay package and used as a tool to motivate individuals to achieve long-term organisational goals. This is an effective incentive as it drives employees to work toward the enterprise’s success with the promise of future rewards. 

Apart from directors and promoters who might have 10% or more equity, all employees are eligible for ESOPs as long as they meet any one of the criteria: they should be a permanent employee who works an Indian or foreign office of the company, the employee should be a full-time or part-time director of the company, the employee should be currently employed in a subsidiary, associate or holding located anywhere in India or overseas. Once eligibility is established an employee can be presented with 4 types of ESOPs. 

Employee Stock Option Scheme (ESOS) 

This is the most popular type of employee ownership. This provides an employee a right but not an obligation. The stocks can only be accessed by the employee till he/she works for the organisation for a predetermined period of time. Until then the stocks remain in the ESOP fund. Once the vesting period comes to an end, the employee will be allowed to exercise his/her options by paying up a predetermined amount.

Restricted Stock Units (RSU)

This kind of employee stock basically represents the employee’s right to receive shares on the occurrence of a predetermined event or the fulfilment of a specific condition. It is only once these conditions are fulfilled does an employee become a shareholder

Employee Stock Purchase Plan (ESPP)

This plan allows eligible employees to purchase company shares at a discount from the Fair Market Value. The tenure and price of the company’s shares by employees is laid out in the terms of the plan that are usually drafted to offer shares as part of public issues.

Stock Appreciation Rights (SARs) /Phantom Equity Plan

With respect to SARs, companies provide cash payments to employees that equals to the appreciation of the company’s stocks for a fixed duration of time. Though these are not technically ESOPs, companies do include SARs in their employee incentive programs as they provide employees with the benefit of ‘owning’ equity without truly bearing the risk.

Sweat Equity Shares (SES)

These are shares issued by the company to its directors or employees at a discounted amount or in return for a consideration instead of cash. This could be their expertise or intellectual property or a much needed value addition.

General Employee Benefits Scheme (GEBS)

Any scheme that takes into consideration shares of the company or shares of a listed holding company that serve the purpose of employee welfare is known as GEBS, This may include healthcare benefits, scholarships, benefits in the event of disability, death, accident or any particular event as specified by the company. 

Related Article- The ESOP Guide | Part 2 How ESOPs work as a talent magnet! 

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