So much is said about employee stock ownership plans (ESOPs) that many candidates ask if they must join companies including them in their salary packages. Companies typically offer ESOPs to exceptional performers in order to instil a sense of ownership in them.
Initially, ESOPs were doled out as rewards. Nowadays, start-up firms announce ESOPs to attract and retain new talent in their fold. However, some companies also offer it as a ruse to pay less. Many ask if they must accept an ESOP-inclusive offer in such a case.
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ESOPs: A boon or a bane?
You may look at ESOPs in two ways. Let us understand how ESOPs may financially benefit some with the help of an example. Do you remember the Alibaba IPO issue in 2014 when this giant company was busy advising its employees on how they could unlock the benefits from their stock holdings through the New York listing of the company? While the company’s founders raked in billions from the IPO, its employees earned millions by selling stocks at the market price.
This example highlights how accepting ESOPs as a part of the salary package can add to one’s pay and benefits, though the realisation of the benefits takes time. In this case, it took a lot of years for Alibaba employees to earn from their ESOPs sales and profits.
Obtaining ESOPs 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 earn more money than planned.
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Learn about ESOPs before accepting them
But, there is more to ESOPs than the mere purchase price and profits. Many employees are not aware of the concept of the “Vesting Period” when employees are not allowed to buy the company’s stock. This means that they can exercise their ESOPs only after the vesting period is over. In most cases, the vesting period is between three and four years. This implies that employees who leave the company within a year or so cannot exercise rights on their ESOPs.
Forfeiture of the ESOPs means that the employees are bereft of any benefits and, hence, have to content themselves with the salary package alone. This is a common fact as many startup firms have either not launched their IPOs or have closed down within a year or so due to losses or lack of funds.
Employees before accepting ESOP offers must inquire about the vesting period. They must also ask if the company grants partial exercise rights to its employees.
For example, some companies allow their employees the right to purchase 15 percent of the stocks for every completed year of service. This way, employees earn partial exercise rights year after year. If the company does not issue a public offer, holding those stocks would be futile, which is why candidates must ask if the employer company buybacks its shares at a fair market value (FMV) that are generally higher than the prices at which the shares were exercised.
Accepting ESOPs inclusive of the package has its pros and cons, both of which depend on how the company will fare in the long run. For example, One97 Communications Ltd which owns Paytm recently granted 3.9 million new ESOPs to its staff under One97 Employees Stock Option Scheme 2019.
The company’s press release added, “The stock options granted, with an exercise price of ₹9 per stock, can be exercised anytime during the entire period of continuous active employment from the date of vesting of the respective options.” Currently, the shares are priced at ₹467 apiece.
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Know the plan behind ESOPs
There are many reasons why a company may offer ESOPs to both its existing and new employees. One reason is that the company has faith in their employees’ faith and efforts and wishes to reward them in terms of money in the near future. The second and most common reason nowadays is bootstrapping which involves a company relying on limited financial resources to hire from the best available talent in the industry.
Your employer needs you as much as you need a job. Do not allow your potential employer to impose ESOPs on you by including them in your salary package. Negotiate hard before you say “Yes” to it.
In either case, it is a win-win situation for both the employers and employees depending on how they look at it.
ESOP is a benefit plan drawn up for employees. How it benefits you depends on the company’s business potential and how long you are willing to stick to your employer.
Some of the costliest startup firms have gone bust owing to business competence and financial frauds. This may render ESOP facilities futile.
ESOPs are just a part of a salary package. This means that you cannot benefit from the same immediately. Take care to accept them only if you adhere to the company’s long-term vision.
BM Singh, ESOP Expert & Managing Partner, BMSA Consultancy
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