Employee Stock Ownership Plan: What, How, and Why?

Are you looking for ways to give your company increased monetary benefits? Employee stock ownership plan (ESOP) is one of the best ways to achieve attractive financial benefits, that too, with flexibility. 

Moreover, the employee stock ownership plan is a great option for alternative investments apart from unlisted shares and securities. ESOP brings great benefits, and Indian startups quickly noticed them and turned towards it in recent years. 

Further, employee stock ownership plans are beneficial in financial terms and a great way for employee retention. According to the resorts from KPMG, most respondents turned to ESOP for employee retention, and 68% of the respondents implemented or are planning to implement ESOP in their business models.

Employee Stock Ownership Plan (ESOP): Brief Overview

The demand for ESOP shares has been soaring in recent times, considering the buyback benefits it brings for the company and additional employee retention. The way unlisted shares are equally advantageous for investors and the firm, an employee stock ownership plan is an employee benefits strategy that businesses are adapting to generate their ownership interest in the company. 

ESOP drives the employees to give the company their best since their efforts will be returned through financial rewards. Indian startups and even well-established unlisted companies are now selling their unlisted shares to their employees to activate ESOP. Employee stock ownership plan bags several benefits for the sponsoring company, pre-IPO shareholders, and employees, such as tax benefits. 

How Do ESOPs Work?

As aforementioned, an employee stock ownership plan is generally formed to align a company’s succession planning. Usually, ESOP takes place in a closely held company, allowing employees to buy unlisted shares of a company. In simple words, ESOPs are formed to be facilitated as trust funds, which can be funded by the companies who decide to put in their unlisted shares, ones that push their cash in to buy the pre-IPO shares. 

Companies of any size, including well-established big-size firms like Flipkart, HDFC Securities Limited, and Swiggy, can leverage ESOP. The employee stock ownership plan makes the returns a part of employee remuneration packages; it is in the hands of a company to use ESOP to plan participants focused on corporate performance. While it works for the benefit of the employers, ESOPs also bag many returns for employees, generally as a way of passive income. 

Why Organizations Release and Offer ESOPs to Their Employees

With time, more companies are releasing and offering ESOPs to their employees. Wondering why? The prime reason for such plans is employee retention. With growing competition, fighting to survive and retain employees is not easy for any firm; this is where ESOP helps. 

When a company offers ESOP to its employees, they become more productive since their efforts will be returned as a part of their remuneration packages. Moreover, when employees are more productive, eventually, the business will move towards progressive growth. 

Apart from growth and employee retention, another reason for offering ESOPs is the tax benefits since ESOPs are tax-exempt trusts. Moreover, all the profits made stay within the company, that is, no involvement of any third party. Simply put, an employee stock ownership plan benefits all the parties involved. 

Benefits Of Investing In ESOPs

From the above data, it can be easily deduced that ESOPs are the prime key to gaining maximum returns for employees and employers. It bags several benefits, including; 

Maximise Profit From Sale

Since ESOPs increase the productivity rate, sales are also increased. It attracts employees through financial returns and gives them the zeal to work to their full potential. Gradually, the company earns more, and the best part is that the returns on ESOPs, also remain within the company. 

Tax Favoured Liquidity

Business owners have multiple liquidity strategies that can be used to create shareholder liquidity. With ESOPs, a company acquires stocks at a fair market value, similar to a private equity buyer. Further, the ESOPs are tax-exempt trusts, meaning they provide several taxation benefits to employers and employees.  

Low and Slow Ownership Transition

Generally, entrepreneurs treat their startup as their kid; after all, it is their sweat and blood. Considering this, it is evident that entrepreneurs don’t have the will to completely remove their involvement from the company. This is where ESOPs help; they become a smooth way of helping entrepreneurs transition from CEOs to board members to retirement. 
Stockify is the best platform if you are willing to invest in alternative investments such as ESOPs or unlisted shares. We offer you all the detailed insights, including key indicators, EBITDA score, etc.

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Piyush Jhunjhunwala
Piyush Jhunjhunwala
CA, CPA, Ex. PepsiCo, Reckitt, Coty
CEO & Founder
Dubai, UAE.
Rahul Khatuwala
Rahul Khatuwala
Ex. Wipro & Finaco Founder
Co-Founder
Bangalore, India.