There is so much talk about employee stock ownership plans (ESOPs) that many candidates wonder if they should join companies that include them in their salary packages. Companies often offer ESOPs to exceptional performers to instill a sense of ownership in them.
ESOPs: a boon or a bane?
You can look at ESOPs in two ways. Let us understand how ESOPs can benefit some financially with the help of an example. Remember the Alibaba IPO in 2014 when this giant company was busy advising its employees on how they could unlock the benefits of their equity holdings through the company’s New York listing? While the company’s founders raised billions from the IPO, its employees made millions by selling shares at the market price.
This example highlights how accepting ESOPs as part of the salary package can increase pay and benefits, even if the benefits take time to realize. In this case, it took Alibaba employees many years to earn from the sales and profits of their ESOPs.
Obtaining an ESOP from a company with competitive management and high business potential can be financially advantageous for most employees who look beyond salary and package. In this intensely competitive world, ESOPs can help you make more money than expected.
READ MORE: Why you shouldn’t be fooled by ESOP startup options
Learn about ESOPs before you accept them
But, there is more to ESOPs than just the purchase price and profits. Many employees are not aware of the concept of “Grant Period” when employees are not allowed to buy the shares of the company. This means they can exercise their ESOPs only after the vesting period ends. In most cases, the concession period is between three and four years. This means that employees who leave the company within a year or more cannot exercise rights to their ESOPs.
The loss of ESOPs means that employees are deprived of any benefits and thus have to be content with just the salary package. This is a common occurrence as many startup companies have not launched their IPOs or closed within a year or so due to losses or lack of funds.
Employees before accepting ESOP offers should inform themselves about the vesting period. They should also ask if the company grants partial exercise rights to its workers.
For example, some companies allow their employees the right to buy 15 percent of the stock for each year of full service. In this way, employees earn partial exercise rights year after year. If the company doesn’t issue a public offering, holding those shares would be worthless, so candidates should ask if the parent company buys back their shares at a fair market value (FMV) that is generally higher than the prices the shares were at. exercised
Accepting ESOPs included in the package has its pros and cons, which depend on how the company fares in the long run. For example, One97 Communications Ltd, which owns Paytm, recently granted 3.9 million new ESOPs to its staff under the One97 Employees Stock Option Scheme 2019.
The company’s press release added: “The stock options granted, with an exercise price of ₹9 per share, and can be exercised at any time during the entire period of active employment continued from the date of granting the respective options. Currently, the stock is priced at ₹467 each.
READ MORE: Liquidate Your ESOPs? Know the tax implication first
Know the plan behind ESOPs
There are many reasons why a company might offer ESOPs to both existing and new employees. One reason is that the company trusts the faith and efforts of its employees and wants to reward them in terms of money in the near future. The second and most common reason today is bootstrapping, which involves a company relying on limited financial resources to hire the best talent available in the industry.
Your employer needs you as much as you need a job. Don’t let your potential employer force ESOPs on you by including them in your salary package. Negotiate hard before saying yes.
Either way, it’s a win-win situation for both employers and employees, depending on how you look at it.
The keys to take
ESOP is a benefit plan designed for employees. What you benefit from depends on the business potential of the company and how long you are willing to join your employer.
Some of the most expensive startups have failed due to business competition and financial fraud. This can render ESOP facilities useless.
ESOPs are only one part of a salary package. This means that you cannot benefit from it immediately. Be careful to accept them only if you adhere to the company’s long-term vision.
BM Singh, ESOP Expert and Managing Partner, BMSA Consultancy
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Key Things You Should Know About ESOPs
First published: December 20, 2022, 9:44 am IST