Employee Stock Options

An Employee Stock Option is a type of incentive offered by a company to its employees. It gives employees the right (but not the obligation) to purchase a certain number of shares of the company at a pre-decided price, after completing a specified period of service (called the vesting period).

How ESOPs Employee Stock Options work?

• The company announces ESOPs for employees as a part of compensation package.
• Vesting period: Employees must provide service for a specified period (vesting period) to purchase employee stock options.
• Exercise of options: Once the vesting period ends, the employee can purchase ESOP shares at the exercise price.
• Lock-in period may be applicable in certain cases.
• Employees can sell shares at a higher market price to get benefits.

Benefits of ESOPs

For Employees

• Opportunity to build wealth if the company grows.
• Sense of ownership and belonging.
• Can be more valuable than fixed salary hikes.

For Companies

• Retains employees (since they stay at least till vesting).
• Improves performance by making employees think like shareholders.
• Aligns long-term growth objectives.