An ESOP meaning an Employee stock ownership plan applies to an employee benefit plan which allows employees an ownership interest in the company. Employee stock ownership plans are published as direct stock, profit-sharing plans, or bonuses, and the employer has the sole responsibility in deciding who could avail of these choices.
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Employee Stock Option Plans are the plans in which employees get the right to purchase a number of shares (decided by the employer) in lieu of Salary in the company at a discounted price (less than the market price). The option provided under this scheme confers a right but not an obligation on the employee. Employees have to wait for a certain time period – known as the vesting period –before they can exercise the right to purchase those specified number of shares. Upon vesting of options, employees can exercise the options to get shares by paying the pre-determined exercise price.
Traditionally, ESOPs were given to remunerate senior employees and to acknowledge their proven contribution to the company. However, in modern times, ESOPs are used as compensation and motivational tool as startups can’t afford to spend high salaries in the beginning stage. Employee Stock Options in India has gained immense popularity in recent times with the emergence of a vibrant startup ecosystem in the country
Registering your business as a private limited company holds many advantages, some of which are as follows:
ESOPs can be treated as a retainership instrument for small businesses as there is a lock-in period for exercising the right to purchase the shares. Thus, a business can retain its employees. If an employee opts for this option then he has to serve the lock-in period to become eligible to exercise it.
Getting shares of the company in which they are working gives employees an ownership feeling. They start feeling that they are not employees of the organization but owners. Also, they get to share the profits of the company in the form of dividends and are motivated to work for the best of the company.
Businesses that need funds and are not in a position to spend hefty amounts can offer this option to their employees in lieu of salary and motivate them to work for the betterment of the company.
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