ESOP – A motivational tool for startups

Last Updated at: Nov 04, 2019
ESOP - A motivational tool for startups

Traditionally, Employee Stock Option Plans or ESOPs were given to remunerate senior employees and to prove their contribution towards their company. On the contrary, in modern times its used as a tool for startup companies who can’t afford to provide high salaries in the beginning. Employee stock options have gained great popularity in the modern era with the vibrant startup ecosystem in the country.

Register Your Startup

Advantages of ESOP

  1. ESOPs are of great benefit 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 to use this option then he has to serve the lock-in period to become eligible to exercise.
  2. Having shares in a company gives the employees an ownership feeling, employees start feeling they are the owners of the organization as they are also entitled to get a share of the profits of the company in the form of dividends which motivates them to work better which will optimize the job performance of the employees.
  3. Businesses that need heavy fund can use this as an option to the employees instead of salary which would, in turn, lead to the betterment of the company, it is used as the best compensation tool for human resources instead of investing on heavy salaries.

Things to keep in mind before going in for ESOP

  1. With  ESOP the founders shareholding will get lessened and if the company is an unlisted one there wouldn’t be a great market for their shares which would, in turn, lead to disputes between the employers and the employees, due to the disputes the value of the shares might get weekend.
  2. Employees should ensure that the documentation is properly made adhering to the laws considering the present value and future value of the share.
  3. Make sure that there is a proper exit mechanism like, promotor buy back in case listing of the startup is delayed.
  4.  When the shares get allocated they are taxed as salary or prerequisite. For example, when shares are allotted to employee A, he will have to pay flat thirty percent on the difference between the fair value and exercise power.