The word ESOPs stand for Employee Stock Ownership Plans (ESOPs). It involves granting some ownership stake in the company to employees (some or all) with a view to create ownership attitudes. It helps to align employee's interests with that of the company and its shareholders. ESOPs are in the form of Stock Options
A Stock Option is nothing but - an option, or a choice - to buy Shares of your company in the future at a price determined at the time of grant. If the stock price goes up, your Options would be valuable. If the stock price goes down, you can simply refuse to use your option - there's no risk for you. Granting 'Stock Options' is one popular way by which a company reward its employees
An 'Option' is a commitment by the company to grant options to employees on the fulfillment of all conditions mentioned in the ESOP Plan. It is however an 'Option' given to you and not an obligation i.e. you are given an 'Option' to buy Shares of the company in future (at pre-determined price) only if you wish to buy them. You have a right to decide whether you want to buy the Shares or not
The advantage of an Employee Stock Ownership Plan is that from being an employee of the company, you become a part owner of the company
What makes an Option valuable is a simple fact that you get a choice to purchase the Shares at a pre-set price without being at a risk of incurring a loss. E.g. you are granted Stock Options for your company's share at Rs. 100. After a specified period of time when the Options have to be executed, if the price of the same share is Rs. 150 you can exercise your Options and buy share of your company at Rs. 100 only and thus gain a discount of Rs. 50. If the price of the share falls to say Rs. 75, you can refuse to exercise your Options. Thus you have the option of becoming a part owner of the company without being at the risk of incurring a loss
Grant/Exercise Price is the price at which the Stock Options are being allotted to the employee. This is the minimum price which the employee must pay to the company while exercising the Options. Exercise Price is the price that you have to pay to convert the Options into Shares e.g. if the Options are granted at an Exercise Price of Rs.30 and you want to exercise 100 Options then you have to pay Rs.3,000 (30 x 100)
Vesting has two components – vesting percentage and vesting period.
An employee can exercise only those Options which are already vested
The price at which the employee exercises the right to convert the granted Options into Shares is called as the Fair Market Value
The difference between the FMV and the Grant/Exercise Price is called as perquisite value. E.g. if the FMV is Rs. 110 and the grant price was Rs. 100 then the perquisite value is Rs. 10
Employees, who exercise their right to convert Options into Shares, need to pay tax on the perquisite value to the government. The tax rate varies from 30.9% or 33.99% depending on the tax slab of the respective employee
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