In today’s world, we very often hear about new Start Ups emerging up almost everyday. They are of diverse nature covering up simple, creative and innovative ideas from every field. Gradually, with these innovation they are becoming a part of our culture. In this fast changing world these Start Ups face new competitors every day and to beat their competitors for sustaining onto the growth path they want to keep their best resource with them; i.e. Employee.
“Money can’t buy you happiness” A philosophy applicable everywhere and Start Ups are also not untouched with it. Employees want something more than money and therefore now a days lot of Start Ups are coming up with the ESOP (Employee Stock Option Plan). Its a way to encourage the employees to acquire shares of the company by which both employee and employer can benefit. Every employee wants to own a part of the company in which he/she is working (I am sure you believe on the company in which you are working that it will grow in coming times ;-)). ESOP is a type of Employee Benefit Plan which is intended to encourage employees to acquire stocks or ownership in the company. One can also define ESOP as to leave a business in the hands of those who have a deep-seated interest in maintaining its prosperity i.e., to its hard-working employees.
Reasons for ESOP: Many people think that if company is giving ESOP then its for a good reason but their might be many reasons for which company can come up with ESOP and you must understand those reasons. If you are satisfied with that reason and you believe in it then you must go with the ESOP otherwise not. Some of the points are mentioned below:
a.) If company wants to cash out when the M&A market is dormant.
b.) If company is finding difficulty in finding a buyer.
c.) If company wants to reward their employees for their hard work to build a company with strong foundation.
d.) Tax benefits- as company can treat the ESOP as an expense.
Different Types of ESOP: There are different kind of ESOP depending on the objectives of the company; their might be one-time plan or ongoing scheme. Lets understand some of the types of ESOP:
a.) Employee Stock Purchase Plan (ESPP): This is normally used by the listed companies in which employees are given an option to acquire shares of company immediately at a price lower than the prevailing market price. These shares comes with a lock-in-period, as a result, the employee cannot sell the shares and/or the employee has to continue with the employer for a certain number of years.
b.) Employee Stock Option Scheme (ESOS): In this scheme, company provides an option to its employee to acquire the shares on a future date at a per-determined price. Normally the price is lower than prevalent market price. There might be lock-in-period so employee should check the same.
c.) Share Appreciation Rights (SAR): In this no shares are allotted to the employee. This works as an incentive or performance bonus in which the appreciation in the value of the shares between two specified dates is given to employees.
Benefits of ESOP:
a.) Lock-in-period: ESOP is the best tool to retain the great employees. As most of the companies or Start Ups give ESOP with the lock-in-period; so employees take the ESOP if they believe in the company’s growth therefore they stick with the company for the longer term. By which employee and employer both get benefit in a longer run. If employee leaves the company in the meanwhile then his or her ESOP get lapsed.
b.) Ownership: ESOP gives the sense of ownership to the employee and he tries to put his hard work in making the company grow. His mindset shift completely and now he thinks from business owners perspective which is really a crucial part for the development of the company.
c.) Award Instead of Cash: Most of the Start Ups try to give ESOP to increase the CTC for their employee so they can get the best minds in their company. Also, some companies give ESOP as a bonus in place of cash.
ESOP is great tool for the companies to get or retain the great talent in such a competitive environment.
Will you subscribe to your company ESOP?
If you have something to add, Please post your thoughts in comments. I would love to hear from you.
Happy Investing!!
Most corporations, however, use stock ownership plans as a form of in-kind benefit as a way to prevent hostile takeovers or to maintain a specific corporate culture. The plans generally prevent average employees from holding too much of the company’s stock.