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Fundamental AnalysisEmployee Stock Ownership Plans (ESOPs) have emerged as one of the most effective ways to both create and retain wealth for employees and owners in the modern business environment. They enable employees to share in the ownership of the organization, in which they play an integral role in building, advancing from a team member to a stakeholder in the organization's success.
Employee Stock Ownership Plans (ESOPs) are structured plans that provide employees the right to purchase shares of the company at a price determined in advance after a specified period. ESOPs act as a bridge between employee performance and company success — establishing a link based on loyalty to the organisation, contribution to the organisation's success, and alignment with a long-term goal. In short, ESOPs are simply a benefit to employees that allows them to "own" a piece of the company in which they work, capturing some of the benefits of the organisation's growth and increasing valuation.
Why companies elect to use ESOPs:-
The company issues ESOPs to eligible employees as a part of their compensation package. The issue allows them to have the option (not the obligation) of purchasing stock at a specific future date at a fixed "exercise price."
The Grant Letter will include:
Employees will accumulate a right to exercise the ESOP in stages over time period—this process is known as vesting. Example: If an employee receives an ESOP grant of 1,000 options with a four (4) year vesting schedule, with a vesting of 25% per year, they will be able to exercise 250 shares each year. Vesting serves the dual purpose of retention and rewarding the long-term commitment of the participant. Some plans tie vesting schedules to performance milestones.
After the options have vested and the employee can exercise them, the employee is now able to "exercise" the options, meaning that the employee purchases the shares by paying the predetermined exercise price, regardless of the current market price.
| Exercise Price | ₹100 |
| Market Value | ₹300 |
| Gain | ₹200 per share |
Employees have options to keep the shares or sell, usually depending on a liquidity event such as an IPO (Initial Public Offering), buyback, or secondary share sale.
After the employee has exercised their options, if the employee has received shares, they may sell their shares as well. The employee sells the shares in one of two ways: either on the open market (for listed companies) or to an investor (or the company) (for non-listed companies). The profit made from the sale is treated as a capital gain for tax purposes. Sharescart eases this process by linking you to vetted buyers, taking care of the paperwork, and facilitating a fast, safe, and no-fuss transaction. Get immediate liquidity while maximising the value of your ESOPs.
Employees will easily be able to sell their ESOP shares on the open market after their exercise; with a publicly available share price, the valuation of the shares will be easy to establish, and liquidity guarantees effective exit strategies.
Liquidity may be limited. Employees will only be able to sell shares in the ESOP during a company-led buyback or through a secondary sale process. A valuation will have been conducted by a merchant banker who is registered with SEBI and follows regulations for these valuations.
Start-ups frequently utilize ESOPs to reward early employees for their substantial risk and to preserve cash in the early days. Tax deferrals are provided to start-ups under the government law
For Employees:
For Employers:
Employee Stock Ownership Plans (ESOPs) can be an excellent means of participating in a company's growth. However, there are a few reasons an employee may decide to sell (the ESOP shares have to be converted to shares before a sale occurs)
In some instances, a shareholder needs liquidity for personal consumption or other immediate financial needs. If a shareholder sells some ESOP shares, this is an easy way to get cash.
If the current market price of the shares has reached a price level that the shareholder believes is the best sale price, selling will lock in the profit.
Sometimes, the tax burden associated with the gain from the ESOP shares can be material. Employees may decide to sell if the balance after taxes provides sufficient profit to meet their financial needs or goals.
You cannot directly sell ESOPs. The ESOP must first be exercised (the vesting period is typically 3-4 years) to convert options into shares. It is only after you have exercised the ESOP that a sale becomes possible, based on your personal financial goals. Strategically selling ESOP shares will allow the employee/stockholder to realise gains, satisfy financial goals, and manage portfolio risk.
Selling a portion of ESOP shares can provide liquidity to reduce concentration (e.g., by reinvesting in other companies). When it comes time to consider future investment, a balanced and diversified investment portfolio is essential.
The taxation of ESOPs occurs twice: at the time of exercise and at the time of sale.
Upon exercising the options, employees' taxable income is the difference between the Fair Market Value (FMV) and the exercise price. This amount is considered a perquisite income that is, the income is added to the salary.
The employer will deduct the TDS on the entire amount as per the slab rates applicable.
The difference between the sale price and the fair market value (at the time of exercise) is taxed as capital gains.
| Type of Company | Holding Period | Type of Gain | Tax Rate |
|---|---|---|---|
| Listed | > 12 months | Long-Term | 10% (u/s 112A) on gains > ₹1L |
| Listed | ≤ 12 months | Short-Term | 15% (u/s 111A) |
| Unlisted | > 24 months | Long-Term | 20% with indexation |
| Unlisted | ≤ 24 months | Short-Term | As per income tax slab |
For compliance purposes, companies are required to identify the fair value of options on the date of grant with an appropriate valuation model, such as the Black-Scholes model.Â
This assures both accounting in the record and compliance for tax purposes.
Amit Has Only 6 Months to Exercise His ESOPs, but ₹1.6 Crore — Here's How Sharescart Saves His Gains
Employee Stock Ownership Plans, or ESOPs, can have tremendous value; however, exercising them usually means a sizeable cash outlay including both the exercise price and taxes due. Let's break it down with an example.
Amit works at a fast-growing, early-stage startup and has 1,00,000 vested ESOP options — this means he has the right to purchase a share of the company at a set price, but he must exercise the options within a certain time frame - in Amit's situation, 6 months
If Amit decides to exercise his ESOPs:
This is the issue: Amit does not have ₹1.6 crore on hand. If he does not exercise all or part of the options within 6 months, all of his ESOPs will expire worthless, and he will have lost the potential market value of ₹3 crore.
This is where Sharescart becomes relevant. Sharescart is a bridge funding platform that supports employees to unlock the value of their ESOPs. Here's how it works:
Without Sharescart, Amit's ESOPs would have expired uselessly, missing out on a potential value of ₹3 crore.
With Sharescart: Amit exercises his options, pays tax, sells the shares, and collects ₹1.4 crore in cash. In laymen's terms: Sharescart fulfils the promise of employee invested value close to ₹1.4 crore and will sell the ESOP if the employee has no cash to purchase it, while ensuring the employees do not leave their invested value to expire because they lack cash.
ESOPs are so much more than just a compensation tool — they create a culture of ownership and alignment for employees that directly supports the ongoing long-term success of the business. For employees, ESOPs can be an important opportunity for wealth building — if they (the employees) understand tax consequences, valuation, and timeframes associated with liquidity. For employers, ESOPs can provide a strategic advantage — loyalty, innovation, and a focus on a shared growth mindset are cultivated. When designed in an open and transparent way and managed in a responsible manner, ESOPs are a true win-win for employees and the organisation.
You can scan through the companies and decide which company to invest in. Once done, you can tell our team about the desired investment.
Our team will share the account details so that you can transfer the trade amount into our account. We will notify you about the document needed beforehand.
The shares will reflect in your Demat account within 24 hours, depending on the holidays. Our details would be available to you before the transfer.
We can help you with your portfolios by managing your investments and assisting you in the buying and selling of shares.
To help you better we would require a few details related to the shares you want to sell and the price at which you want to sell.
We find out a suitable buyer for you and once you accept the trade we move on to the next step.
The account details would be provided to you for the transfer of shares. We will notify you about the details needed for the trade beforehand.
Once the transfer is done, the payment would be transmitted to your account within 24 hours, depending on the holidays.
When you leave without vesting, generally unvested ESOPs are cancelled. Vested ESOPs usually can be exercised after you depart, often within 3 to 6 months, depending on the company's ESOP plan.
For companies listed on a stock exchange, you can sell the shares any time after you exercise the ESOP option and the shares are in your demat account. If the company is unlisted or otherwise a startup, you can only sell the shares if and when the company announces a buyback or has a process for secondary sales.
Whenever you exercised your options to hold shares, you entered into a market risk situation, and if the valuation of the company drops, so do the shares.
Receiving ESOPs as a grant is done at no cost. The only cost is the exercise price when you exchange options for stock after vesting.
The company provides FMV (fair market value) based on periodic valuations by a merchant banker. This process gives staff an objective sense of the paper value of their holdings.
Yes. Many Indian corporations also offer ESOPs to their employees in their subsidiaries abroad, and this is subject to FEMA and RBI regulations
They should have board and shareholder approval, implement a clear ESOP policy, have valuation certificates, and communicate openly with their employees.
ESOPs allow employees to share in the value creation of the company, which provides them the ability to create wealth over time and in conjunction with the success of the company.
No, ESOPs can only be issued to employees or directors of the company, although consultants and advisors may receive similar benefits through phantom stock or SAR-based plans.
No, ESOPs are not defined as a supply of goods or services, so they are excluded from GST.
The cliff period is the amount of time an employee must be with the company before their ESOPs vest, which is typically one year.
Yes, companies can reprice or restructure ESOPs, but this requires board approval and shareholder approval if there are significant changes in market conditions.
Yes. ESOPs are valuable to the employer in that the employer is able to retain the best talent, align employee interests with company goals, and preserve cash while rewarding performance.
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