ESOP

Buzz word of the corporate world today….what is it all about ?? Why this hue and cry??

ESOPS stands for Employee Stock Option Purchase Scheme..this is a scheme instituted by the Company management to retain the technical staff for certain period of time called the vesting period. With the software industry in a boom, the ESOP is highly popular in that industry.

ESOP is an option granted to an employee to buy the underlying shares or opt out of it. The employee is requested to sign an options agreement, which, interalia, states the vesting period, criteria to opt for the shares and number of options granted, time period within which the options should be availed, etc.

Example: If Company X has 5 Crore options in the Scheme. It recognizes certain hierarchy of employees who are eligible for that and get an option agreement signed by them. By and large, the vesting period is 3-4 years (in Indian context). The agreement terms may be like this:

Mr A can opt for 5 Lakhs of shares over a period of 4 years. He can opt to purchase 1 lakh upon completion of one year subject to performance levels set by the company. Upon completion of second year, A would be eligible for another 2 Lakhs of shares and so on and so forth. At the end of year one, if A wishes to leave the company, he can opt to purchase only 1 lakh shares and he would stand to loose the balance options for 4 lakhs shares.

The ESOP is granted to employees at a much lower price than the prevailing market prices. In Indian context again, the usual trend is to offer the shares to employees at a price that is reduced by 50% than the prevailing rate on the Stock Exchange on the previous day. Example: if the market price on 4^th March 2008 is Rs 200, and Mr A opts for 1 Lakh shares on 5^th March 2008, then he should pay the company Rs 100 lakhs (Rs 100 X One lakh shares) and he would become the owner for One lakh shares in the company.