ESOPs means Employee Stock Option Plan or Employee Stock Ownership Plan. ESOPs are generally give to employees from employer. Part ownership of company to workers.
When new student join company they only know about CTC and cash in hand after deductions. Salary means paycheck that employer gives every month, quarterly or yearly basis.
In the 20th century, the standardization of monthly salaries across many countries are accepted. It benefits employees for their stability.
ESOPs Employee Stock Ownership Plan
Every worker most know some important points before taking ESOPs. Grant Date, Vesting Period, Exercise Price, Cliff, Fare Market Value, etc are basics of ESOPs.
Grant Date is a date, on that date company offer you a ESOPs letter. Company offer ESOPs to employees at that date.
Vesting Period is a time frame in that company give you equally ESOPs. Vesting period is minimum have 1 years, max limit is not defined. In india, generally vesting period is of 4 years.
Exercise Price is the past price at which company promise to give stocks when your want to exercise your stock options.
Cliff is the minimum time period you need to work in that company. In other words, you have no choice to vest your options.
Fare Market Value is the current stock price according to current market cap for listed companies or valuation of last funded round.
Which Employees have More Advantage of ESOPs ?
There are three scenario of ESOPs. First one is Startup, 2nd is Small Listed Companies and last is Large Cap or MNCs. For Startup ESOPs is best suited, because when any startup start their operation their main focus to get listed in secondary market.
So if you worked in or want to work in startup then you should choose only if they want to listed in stock market, otherwise when you leave company it will be hard to exercise your stock options.
Small Listed Companies, again ESOPs is best option because you get actual market value for your stock options, liquidity is very high in listed companies, while unlisted companies having less liquidity.
Listed companies are under the control of SEBI, it controls listed companies just like police regulate people of country.
In case of Large Cap or MNCs, ESOPs is less beneficial because of less growth in the company. Low growth means less valuation of your ESOPs when you want to exercise.
Real Life Example of ESOPs
NVIDIA is largest GPU maker in the world, company offer ESOPs to their employees 5 years ago now they are millionaires because stock price grow 24x in last five years.
If you join PhonePe in 2024 and company agree to give you 100 ESOPs at exercise price is 10 for 4 vested years and their vesting time frame is yearly then you will get 25 ESOPs at every year.
After four years you want to leave company and they give you exercising period is one year means you need to buy shares at 10 rupees price after four years. If you fail to exercise your shares within given period then ESOPs have zero value.
Suppose currently shares of phonepe trading at 100, then you have rights to buy phonepe shares at 10 rupees. you can hold shares till IPO or sell to your friends through CDSl.
