Learn All About Employee Stock Option Plan

  • Blog|Company Law|
  • 3 Min Read
  • By Taxmann
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  • Last Updated on 2 February, 2021

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ESOP or Employee Stock Option Plan is generally an employee benefit scheme that is floated by the company to encourage the employee ownership in the company. This is generally opted to encourage employee to partake more in the company’s functioning as a shareholder and generate more value for the company by enhancing its performance and contributing towards its growth.

Who can opt for Employee stock option plan?

All the employees of a company can opt for Employee stock option plan when offered by their organizations and they fit its criteria. Generally, the employee should be a permanent employee of the company except for the director. Also, employees from subsidiary or associate company can opt for Employee stock option plan when offered. Directors who have more than ten percent stake in the company cannot take part in Employee stock option plan program.

How does employee stock option plan work?

When company floats Employee stock option plan, it usually offers its employees to buy company shares at a set price which is lower than its current market price. It is a very common phenomenon in startups in India, to engage the employee more for the benefit of the company when they are not able to do so in terms of their fixed compensations. Companies Rules, 2014 governs ESOPs in India. Here is a systematic process to float an Employee stock option plan 

Product image

Company drafts its Employee stock option plan scheme and must get it approved in its shareholder meeting before floating it for the employees. 
Once it’s approved, a Letter of Grant is issued to employees who will have information about the ESOP offer like number of options they are granted under this scheme, the vesting period and how the exercise price would be calculated.
Options are not shares themselves, it is only when the employee exercise his option that he owns the shares at pre-set value. To exercise his options, the employee must make an ‘Exercise Application’.

Advantages of Employee stock option plan:

ESOP has two way benefits- one for the employee and another for the company. Employee stock option plan turns out to be a form of incentive floated by the company which kind of creates an ownership of employee in the company and then they shall work towards the goals of the company as they will have their personal interest vested there. They will be more productive and would produce less wastage. <Employee stock option plan also tend to provide intended financial benefits to the employee as its part of his income. When employees are given Employee stock option plan options then they feel more responsible and respected. They are then part of decision making process of the company and helps turn around their complete lookout towards the company. They are more secure and reliant in their current job and are more satisfied with their work.

Some Facts to know about ESOPs:

Employee stock option plans are valid only for their exercise period, after which they cannot be converted into shares. Hence they are not a lifetime offer for an employee. The employee must be a permanent employee while exercising this option. If he resigns from his current position, then this ‘Letter of Grant’ shall also expire. One needs to pay the exercise amount to own the shares. Just obtaining the ‘Letter of Grant’ does not mean that you own the shares of the company. Employee stock option plan is a legal phenomenon and have several laws drafted regulating it. It touches upon SEBI, Income Tax Act and Companies Act at several points.

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