Employee Stock Option Plan is practically an incentive, granted to an employee, director, or officer to buy or subscribe to the shares of the company at a pre-determined rate in the future.
The ESO plans are agreements between a company and its employees that give employees the right to buy a specific number of the company's shares at a fixed rate within a specific period. Nevertheless, it is for you to decide, what is best for you. Salary VS ESOP?
ESOP’s are offered to employees against a chunk of salaries. The company decides that a particular percentage of its shares should be distributed among its employees. In most companies, a few employees, after attaining a certain level of seniority, are given shares against a part of their salary.
Many companies award 100 options in parts like 25 options a year and after the options are awarded to the employee, they are converted into shares. The employee can cash them by selling them to the company again.
However, ESOP holders can purchase a certain amount of shares at a pre-decided rate, which is agreed upon at the time of negotiating their salaries. Despite the per share rate of the company growth, for the ESOP holders, the stock will be sold at the same rate to the company as decided during the time of employment. This saves the company from giving a huge chunk of money to the employees. Giiving ESOP's to the employees is an unconventional hiring strategy of the smartest companies to save money.
An ESOP is a defined payment employee benefit plan that allows employees to become owners of the commodity in the company they work for. It is an equity-based deferred compensation plan.
Several features make ESOPs unique as compared to other employee benefit plans and normal basic salary.
However, the latest trend adopted by startups is that they keep the cost of these shares too low. An ESOP basically is a tempting attempt of the companies to merge your savings and earnings into one bundle. These are always subject to market risks and all of it flushes down if the company fails to perform.
The corporation can make your distribution in stock, cash, or both. Many ESOP participants withdraw with an account that has both stock and cash in it. The cash will be paid out in cash. The share portion may be cashed in, so you will get money for the shares as well. Also, this gives you a chance to hire the right talent for your startup without you paying a huge salary they demand.
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Contributor: Sareen Yasmin
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