If you have ever come across the term ESOP in your offer letter or salary slip and wondered what it really means, you’re not alone. ESOPs, or Employee Stock Ownership Plans, are becoming a common part of compensation packages today, especially in fast-growing companies and startups. But how do they actually work? Do they add any real value to your salary? And most importantly, how can you benefit from them without dipping into your savings?
Let us break down ESOPs in simple terms and explore how they can help you build wealth over time.
Looking to buy your ESOPs but short on funds? Use ESOP financing to convert your options into ownership, without selling other assets. Apply now
What is ESOP and what does ESOP mean in salary?
An ESOP, or Employee Stock Ownership Plan, is a benefit that gives you the right to own shares in the company you work for. While ESOPs are not the same as a cash bonus or direct salary, they’re offered as a part of your overall compensation. Think of it as the company giving you a chance to become a shareholder in its future growth. Over time, you can exercise these options, meaning you pay a pre-agreed price to buy shares. If your company’s value goes up, the shares you own could be worth a lot more, leading to potential long-term gains.
Understanding ESOP terms
To understand how ESOPs work, it helps to know a few key terms:
ESOP (Employee Stock Option Plan): Gives you the right to buy shares at a fixed price, usually lower than the market price.
ESPP (Employee Stock Purchase Plan): Lets you buy shares using money from your salary, usually at a discount.
RSU (Restricted Stock Unit): Company promises to give you shares in the future once certain conditions are met.
Grant date: When your company offers you the stock options.
Vesting date: When you become eligible to buy the shares.
Vesting period: The time you must stay with the company before you can own the shares.
Exercise period: The time frame in which you can buy the shares after vesting.
Exercise date: When you actually buy the shares.
Exercise price: The price you will pay to buy each share.
FMV (Fair Market Value): The current value of the company’s shares.
Ready to unlock your ESOPs? Finance your options today and hold your shares without selling other investments. Apply now
Cost of ESOPs and distributions
Let us take a closer look at the financial side of ESOPs:
Grant price: This is the price set when your ESOPs are offered usually lower than market value.
Vesting period: The waiting time before you can buy your shares.
Exercise price: The fixed cost you’ll pay per share when buying your ESOPs.
Fair market value: The market value of the shares at the time of buying.
Taxation: ESOPs are taxed at two stages, first, when you buy the shares (exercise), and second, when you sell them.
Want to hold on to your shares but lack immediate funds? ESOP financing lets you buy and retain your shares – no need to liquidate.
Apply now
Why do companies offer ESOPs to their employees?
Companies offer ESOPs to reward performance and encourage loyalty. Here is why they matter:
Attracting talent: In competitive markets, ESOPs help companies attract skilled professionals by offering a stake in future profits.
Retaining employees: The vesting period keeps employees invested in the company long-term.
Alignment of goals: When you own part of the company, your goals align with its growth.
Non-cash compensation: ESOPs let companies offer a strong benefit without raising salary costs immediately.
Performance rewards: ESOPs are often tied to your performance or the company’s success, making them a motivational tool.
