How to make the best use of your ESOPs

What is an ESOP?

employee stock option plan, or esopA plan through which employers give their employees the option to buy company stock at a specified time and specific price at little or no additional cost.

Thus, as the name suggests esop There is an option to buy the shares at a later date. The employer decides which employees will offer the number of shares, timing, value and ESOPs to be allotted to each employee.

Once an employee is given ESOPs, he has to retain them until the end of the vesting period. Once the vesting period is over, the employee can exercise the option to buy the company’s stock at a fixed price.

What to do with ESOPs?

Since an esop The right to exercise the option to acquire shares of a company, the employee can choose when and when he wants to exercise the option.

Till the vesting date, the ESOP holder cannot take any action. These options are available on the vesting date.

Do you need money for your personal needs?

If the answer is yes, then you should exercise your option.

Do you want to make profit?

If your answer is yes, then you should be in numbers. If the grant price/fixed price at which you can buy shares from the company is less than the market value/fair market value, you may consider exercising the option.

Can you pay to exercise the option?

“While exercising your options, which is converting the ESOP into stock, it is understood that the exercise price is to be paid. However, the very important perquisite tax is often forgotten. Therefore, you must not Should be in a position to not only pay the exercise price, but also be able to pay the perquisite tax”, explained Sandeep Jethwani, Co-Founder Deserve.

“In fact, in many cases, the amount of perquisite tax is much more than the exercise value”, said Jethwani.

let option lapse

If you do not need the funds or cannot arrange capital to exercise your option, you must allow the option to lapse.

Also, if the market price of the shares is less than the exercise price, you can let the option expire.

company getting listed

When the company is moving towards IPO, the discussion about ESOP increases in the organization.

So, if someone has an ESOP in a company that is going for an IPO, what should he/she do?’

“When a company is about to go public, ESOP holders have a choice whether they should exercise these options before or after listing. There are two factors that need to be considered before taking this decision, firstly liquidity and secondly the upward outlook,” said Jethwani.

If you need money for a financial goal, you can consider exercising the option. However, remember that if one were to exercise the ESOP prior to listing, the shares thus acquired need to be held for six months after listing. This has a direct impact on your liquidity.

On the other hand, ESOPs used post listing can be sold almost immediately (subject to employee trade restrictions).

So why should one consider conversion before listing? This brings us to the second and most important aspect to consider when you hold an ESOP and the company is getting listed — the potential upside.

This is where your confidence in the company as an employee will help you make a decision.

“As an employee of a company known for its IPO, you have a unique perspective and understanding on the intrinsic strengths and inherent potential of the company,” said Munish Ranadeo, Founder and CEO, Servin Family Office.

“This will help you evaluate how the company will perform in the long run,” he said.

If you believe the company’s shares will be listed at a premium and will perform well over the long term, you may choose to wait until the shares are listed, to find an appropriate time to exercise your option and You can later sell the shares. In profit.

“However, as an employee, you must remember that various factors affect how a company’s stock will perform once it is listed. And many factors are not under the control of the ESOP holder.

Therefore, it is wise to exercise your option only if you intend to sell the acquired shares or the financial goal or requirement requires funds,” concluded Ranadeo.