Employee Stock Option Schemes (ESOP)

What Is Employees Stock Option Scheme?

Employee Stock Option Plan or ESOP is a right given to employees (including whole-time directors and officers) to purchase shares of a company at a future date and at a pre-determined price. It is one of the equity-based incentives available to employees in today's era of globalization and has emerged as an effective tool to attract, retain and reward human capital. A stock option granted under the plan confers a right but not an obligation on the employee. An option can be converted to shares if the holder of the option fulfils certain conditions. These conditions are the vesting criteria and can be either number of years of continued service after receiving the option, meeting of some performance-oriented goals by the option-holder, or both. After the vesting criteria are satisfied, the option becomes "vested". A vested option provides an option-holder with an unfettered right to "exercise" the option and be "allotted" shares of the company. But if the employee is terminated on ground of misconduct, his vested options would lapse.

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Best Tool For Start-ups

The start-ups which are in the early stages of their businesses lack the ability to pay competitive and high salaries to their employees which established businesses or large corporations can afford to pay, although the former requires good share of human capital because of them facing resource constraints, and unstable cash flow. Start-ups and other established companies often require motivated employees who can over-perform and exceed their expectations. Therefore, with an aim to retain and incentivise employees, companies come up with rewarding performance bonuses, revenue shares, stock options or a stake in the company.


Non-Cash Retention
Productive tool for
Realization of Ownership for employees
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