With the impending recession staring down at all businesses across the globe and the COVID -19 spreading its effects to the stock market, the owners of companies have no option but to cut down the salaries of their employees losing out on the quality talent.
But a few companies, especially startups are resorting to ESOPS as a way to retain good talent. While ESOPS isn’t a new concept but is definitely gaining traction as a go-to option in these uncertain times.
So, let us help you understand better about ESOPS.
What is ESOPS?
To put in simple words, ESOPS - Employee Stock Ownership Plans is a stock-based compensation provided by the employer to its employees. As part of this compensation, the employees share the ownership of the company by owning shares in that company.
Now, companies go down to this lane for two major reasons -
To retain the qualified employees for a longer period
To manage the cash flow of the company
Well, now that the definition is out the way, here are the pointers that you need to know before accepting ESOPS:
By accepting ESOPS, you don’t get actual shares of the stock - yet but you get the right to buy/exercise a set number of shares at a fixed price later on. And this right comes to you after a set period of time - this period is called the vesting period. Usually, the vesting period is four years but it can be reduced to 12 months where the shares are handed over to you on a quarterly basis.
P.S: If you leave or get fired from the company before the vesting period, consider your ESOPS lost.
ESOPs are actually advantageous for the employees and hence they are taxed accordingly. For example, if the employee decides to sell the shares (which you can do only after a certain period of time) and if the employee gets money higher than Fair Market Value then he/she will be liable to pay Capital Gains Tax.
Future of the company
You must do your part of research before accepting the ESOPS offer. Will the company be the market for the next 4-5 years? How scalable is the business model? What are the risks involved for the money? - Get all these questions answered before dabbling with the company’s shares.
You must remember that you will be giving up part of your salary to ESOPS. While it is nothing but an investment, give it a thought. Just because you are not getting part of your salary to your hand doesn’t mean you are losing out on anything. But yes, keep your personal commitments in mind and plan your monthly expenses accordingly.
Terms and Conditions
Thoroughly understand the terms and conditions of the ESOPS agreement that you are about to make it with the company. Get on a call or have a meeting with the employer face-to-face to completely understand what you are getting yourself into. Give extra attention to all clauses.
Bottom line - ESOPS is definitely is one of the best options for a startup company to attract or retain qualified employees and for the qualified employees, it is always a great option to go for ESOPS provided you have done your research.
Keeping all the technical terms aside, ESOPS serves as the perfect morale booster for the employees and as an employee you cannot stumble upon any better incentive/investment plan than ESOPS.
Written by: Dheeraja Manvi