ESOP Valuation

ESOP Company Valuation Consultant in India

Employee Stock option Plan (ESOP) is a corporate strategy for retaining and motivating employees. Under which a company gives its employees the right to buy a certain number of shares at a fixed price (grant) for a certain period of time in years. An employee is required to complete the vesting period to exercise the option. New generation companies are using ESOPs to retain highly skilled employees. In an extremely competitive IT sector, the sense of ownership encourages employees to pursue a long-term career. It is a right, not an obligation for employees to buy shares at a predefined price. The option is granted only to permanent employees and to directors not acquiring more than 10% share value.

To start with the mission is employee retention, but ESOPs also help in saving of cash compensation. By granting stock option to employees, a company can save funds to channelize the growth. The benefit received by employees is taxable as perquisite. ESOPs are used extensively in unlisted companies in such case an exit option is provided to the employees.

How are options granted?

It starts with preparing an ESOP scheme draft which is presented before shareholders and Directors for consent. The scheme document includes eligible employees, vesting period, vesting criteria, exercise price, exercise period, etc. SEBI registered Merchant Bank carry out the valuation for accounting and taxation purposes. The consent of shareholders in form of a board resolution is filed with the high court before announcing the scheme.

ESOP provisions for unlisted Companies:

ESOP can be provided to a permanent employee of the company working in or outside India, Director of the company, or employee of a subsidiary or holding company.

ESOP cannot be provided to employees who are also promoters, or to a Director who directly or indirectly hold more than 10% equity shares of the company.

Stocks granted to employees have a minimum vesting period of one year and are non-transferable. However, as the mission is to retain the employees, a company may keep this period to a minimum of 3-5 years.

The shareholders of the company must approve scheme by passing a special resolution favoring the draft in the extraordinary general meeting.

The explanatory statement discloses appraisal process, total number of options to be granted, exercise price, exercise period, method of accounting, requirements of vesting, etc.

Before granting the option, a company has the option to determine the exercise price to make the scheme attractive and effective.

To maintain information relating to options granted to employees, the company must maintain ESOP register.

Types of options:

  • Employee Stock Option Scheme (ESOS)
  • Employee Stock Purchase Plan (ESPP)
  • Stock Appreciation Rights (SARs)
  • Restricted Stock Award (RSA)
  • Restricted Stock Unit (RSU)

CCV is a registered valuer and a category I merchant banker and a leading brand for clearances pertaining stock option plans. It offers a blend of services to assist you in ESOP Valuation, planning, and management.