ESOPs (Employee Stock Ownership Plan) are no longer a foreign concept in the Indian market since many reputable companies offer them. This is a compensation plan offered by employers to their employees. The underlying concept is to retain talented employees by offering them a chance to buy shares of the company they are working for. It is an organization's way of rewarding hard-working employees for their dedication.
What is ESOP financing?
In ESOP financing, financial institutions offer loans to employees to help them exercise their option to purchase the shares allotted to them through ESOPs. In such situations, employees do not generally use their money or investments. Owning ESOPs are an effective way by which employees can directly take part in the company’s success Holding shares also enable the employees to reap financial benefits because they can sell off the shares allotted to them through ESOPs at higher rates.
Through ESOP financing, also called ESOP funding, an employee gets an option to avail funds against shares allotted to them without waiting for the vesting period to end. They can use the loan facility to buy and hold equity shares of their employer’s company and sell off the shares anytime they want to create wealth. Therefore, ESOP financing is often described as a quick way to avail funds.
The loan amount granted against ESOPs usually depends on the grant price, market price, and vesting period of the ESOPs.
How does ESOP funding work?
ESOPs are usually set up as trusts, and ESOP financing can be described as a loan facility. This provision is available against shares an employer has granted or allotted in their employee’s name. Allotments depend greatly on the employer's discretion.
After the employer has completed the allotments, ESOPs will remain in the trust fund until the vesting period. After completing the vesting period, the person holding the ESOP can exercise their options, such as buying the shares.
Generally, people receive an allotment letter that mentions the details of the number of shares allotted, and the timeframe during which they can exercise the option.
