It has been traditional for ESOPs to be used to remunerate senior employees and prove their value to the company. In modern times, it is used by startups who cannot afford to provide high salaries at the beginning. Since the startup ecosystem in the country has flourished in the modern era, employee stock options have gained a lot of popularity.
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Advantages of ESOP
- It is advantageous for small businesses to use ESOPs because they have a lock-in period for exercising the right to buy shares. This allows a company to retain its employees, but employees must serve the lock-in period in order to exercise this option.
- As a result of owning shares in a company, employees begin to feel as if they own the organization, as they also receive a share of the profits in the form of dividends, which motivates them to perform better, which in turn optimizes their job performance.
- In businesses that require a large amount of funds, this can be used to compensate employees instead of paying heavy salaries, which will ultimately benefit the business. It is the best compensation tool for humans rather than investing heavily in salaries.
Before going into an ESOP, here are a few things to keep in mind
- With ESOP the founders shareholding will get lessened and if the company is an unlisted one there won’t be a great market for their shares which might lead to disputes between the employers and the employees, which can reduce the value of the shares.
- To ensure proper documentation, employees should adhere to the laws considering the present value and future value of the share.
- The startup should have a proper exit mechanism, such as a promoter buyback, in case of a delay in listing.
- Shares allocated as salary or prerequisite are taxed. The difference between the fair value and exercise power will be billed to employee A at a flat rate of thirty percent.