What Is ESOP Employee Stock Ownership Plan Explained
Employee Stock Ownership Plans (ESOP) have become popular recently due to the various benefits they provide the company and the employees. It is a well-known fact that we tend to care about the things we own and providing employee stock options in the company makes your employee feel a sense of ownership in your company. Employee Stock Ownership Plans (ESOP) have become popular recently due to the various benefits they provide the company and the employees. It is a well-known fact that we tend to care about the things we own and providing employee stock options in the company makes your employee feel a sense of ownership in your company.
What are the AssociatedCosts?How to Register an ESOP?There are no ESOP up-front costs associatedwith providing ESOP to the employees. Thecompany may even choose to hold the shares onbehalf of their employees in a trust, and laterhand them over to the staff member when theyleave the company.Due to such a vesting date, the employeebecomes eligible to earn an increasing amountof equities every year, until they remain inservice with their company. When the employeeleaves the company, the company can ‘buy back’their shares from the staff member. Based oncompany policies, the organization can pay alump sum amount for buying the stock back.• Following are the steps to be following whileregistering for an ESOP:1. Create the ESOP BlueprintCreating a blueprint of the Employee StockOwnership Plan outlining the exact ESOP rulesis essential for granting ESOP benefits to youremployees. This blueprint will outline whichemployees are to be included under the ESOP,under which conditions they become eligible forESOP and what happens when theiremployment with the company is terminated.2. Documentation and ApprovalsOnce the blueprint is created, it is proofreadthoroughly and documented to avoid anyloopholes. The blueprint is then shared with theboard of directors and other stakeholders in thecompany for their approval. They may evensuggest some changes if required and themodified document is once again sent forapproval.
3. Draft Director’s ResolutionsEvery time a new option is granted to an employee, you should discuss it withmanagement perspective and your director for collecting their resolutions in writing,which approves the grant of options to a specific staff member.4. Share the Grant LetterOnce you receive the grant letter from the director, you can issue the ESOPcertificate to the employee. The grant letter lets the employee understand the taxbenefits of their Employee Stock Ownership Plan as well as the number of stocksgranted to them. It also provides them with proof of ownership of their stocks.5. Update RegisterThe company should maintain a register of all stock options provided, the employeeto whom it was shared, grant date, expiry date (if any), exercise dates, etc.Maintaining a record of these values helps the company keep a track of the sharesvested with their employees.
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What are the Associated
Costs?
How to Register an ESOP?
There are no ESOP up-front costs associated
with providing ESOP to the employees. The
company may even choose to hold the shares on
behalf of their employees in a trust, and later
hand them over to the staff member when they
leave the company.
Due to such a vesting date, the employee
becomes eligible to earn an increasing amount
of equities every year, until they remain in
service with their company. When the employee
leaves the company, the company can ‘buy back’
their shares from the staff member. Based on
company policies, the organization can pay a
lump sum amount for buying the stock back.
• Following are the steps to be following while
registering for an ESOP:
1. Create the ESOP Blueprint
Creating a blueprint of the Employee Stock
Ownership Plan outlining the exact ESOP rules
is essential for granting ESOP benefits to your
employees. This blueprint will outline which
employees are to be included under the ESOP,
under which conditions they become eligible for
ESOP and what happens when their
employment with the company is terminated.
2. Documentation and Approvals
Once the blueprint is created, it is proofread
thoroughly and documented to avoid any
loopholes. The blueprint is then shared with the
board of directors and other stakeholders in the
company for their approval. They may even
suggest some changes if required and the
modified document is once again sent for
approval.
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