An ESOP (Employee Stock Ownership Plan) allows committed employees to gain ownership in the company they help build. Under this structure, the company sets aside a portion of its shares in a trust, distributing them to eligible employees over time. To further support this opportunity, ESOP financing enables employees to raise funds by pledging their allotted ESOPs, making it easier to exercise stock options without disrupting personal savings or investments.
ESOP financing from an employee’s perspective
Let us first understand a bit more about ESOP from an employee’s perspective. The grant price and vesting period of the ESOPs are determining factors for an employee's decision to apply for a loan against ESOPs. In other words, a person may opt for ESOP financing if he/she needs funds immediately and when the market price of his company’s share is much higher than its grant price. ESOPs enable employees to acquire shares of the employer company at a nominal price. After holding the shares for a tenure (vesting period) specified by the employer, the employee can sell them off the shares allotted to him through ESOPs and make a profit. Learn how to apply for ESOP financing.
ESOP financing from an employer’s perspective
Through ESOPs, employers reward their dedicated and hard-working employees who may receive profits as the company grows. This motivates the employees to do their best as it will increase their return on the ESOPs allotted to them. It makes them feel that they are participating actively in the growth of their employer company.
But please note that there are other features and benefits of ESOPs as well. It helps the employer company to save their cash outflows because the company does not have to pay cash as rewards. Start-ups and business organisations formulating expansion plans find ESOPs to be a more feasible option compared to paying incentives and bonuses.
Employers can arrange different financing options for employees who wish to exercise their option to purchase the shares allotted to them through ESOPs but do not have the necessary funds to exercise purchase of their vested stock options. The employer company can grant a loan against ESOPs or make arrangements with financial institutions for ESOP financing for their employees. As a result, the employer company can reward its employees without incurring additional expenses.
How does ESOP financing benefit the employees?
If an employee lacks the money to exercise his ESOPs, he/she can use Bajaj Finance’s loan facility. This is because the loan you receive is secured against your shares, meaning you still benefit from any increase in the value of the company.
Factors to consider for ESOP financing in economic downturns
If employers are considering ESOP financing during economic downturns, they need to ask themselves the following question:
- Firstly, employers need to take into consideration the size of their business. Certain market experts would say that a company with a minimum of 75 to 100 employees is good to go when it comes to an ESOP.
- Employers must assess their relationship with their employees and analyse their company culture. These are intangible factors that have the potential to create numerous differences in their succession plan.
- Pursuing an ESOP will lead to a situation where companies will have additional debt. So, employers must not forget to analyse how comfortable they are with having debt in the books.
- Employers should remember that an ESOP is not designed for immediate results. It may help an employee reap the benefits of their hard work, but it may not be the right option if a company aims to maximise its value.
In the event of any financial need, Employees have an option to avail loan against their ESOPs and may be eligible to avail a loan up to Rs. 175 crore depending upon the valuation of the ESOPs and the stock market conditions prevailing at the time of availing the loan. If employee avails loan against their ESOPs, they shall have to pay interest on only the loan amount utilised by them and not on the entire loan amount sanctioned by the lender.
To sum up, if employers are considering offering the benefit of ESOP financing during a stock market downturn, they need to analyse certain aforementioned factors. For instance, they must check the working culture of their company and assess the relationship they have with their employees. They must remember that while an ESOP can decrease the costs of providing rewards, it is not designed for immediate effects.
