Employee Stock Option Plan (ESOP)

1)How a company issues stock to its employees?

2)Does the company buys shares from open market? To transfer to those employees

3)Once its complete, is it similar to normal investor holding? & what if he leaves the company?

1)How a company issues stock to its employees?

There are various reasons for which the employees of a company are given such stock options. The phenomena of stock options is more prevalent in start-up companies which can not afford to pay huge salaries to its employees but are willing to share the future prosperity of the company. In such cases, the employees are given the stock options as part of the compensation package. Moreover, in some cases, the employee is given such stock options which he can exercise in future date/s, in order to ensure long-term commitment of the employee. So apart from rewarding the employees with monetary gains, ESOP also help create a sense of belonging and ownership amongst the employees.

2)Does the company buys shares from open market? To transfer to those employees

No, Companies gives ESOPs to employees when they are short on cash as an incentive so that Employees will be more focussed on delivering results as they have a stake in the company

3)Once it’s complete, is it similar to normal investor holding? & what if he leaves the company?

Yes, once the shares are listed on stock exchange employees holding Esops are similar to investor holding and under the ESOP schemes, the terms and conditions on which employee can exercise his rights are spelt in the ESOP scheme. The option given to the employee can be exercised after a certain lock-in period, which is generally more than one year, In case the shares are not listed on a stock exchange, the same can not be liquidated and thus the money gets locked until the shares get listed or the promoters offer you an exit option

when an employee leaves the company it depends on the ESOP policy of the company. The norm is for the unvested ESOPs to lapse upon cessation of employment. This means that the employee will not be able to exercise and avail ESOP benefits from those ESOPs any more.

However, in case an employee suffers a permanent incapacity while in employment, all the ESOPs granted to him as on the date of permanent incapacitation, shall vest in him on that day and in the event of the death of an employee while in employment, all the ESOPs granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.

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almost all listed software companies in US gives ESOPs … once its vested it will come to your trading account , you can do whatever you want with it … either sell it or keep it forever

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for a listed company ,

most of the compnaies issue new shares , diluting the share capital

i got NetApp shares earlier through ESOP … they have given us two options,

  1. profit the difference in share price … ex:- if esop price is 35usd and current price is 50usd , we will get 15usd in our salary account as incentive
  2. pay the esop price and get the share in your account … ex:- pay 35usd and get it in your trading account ( smith barney account )

instead of going for option 2 , we can keep our ESOP non-exercised as long as we are with the company. if we quit then we have to exercise our ESOP and should pick any one of the option

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@Sowjanya_Nr @velu
Well explained
Thanks for ur valuable information

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