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Employee Stock Options, commonly known as ESOP, confer upon the employees, right to buy shares in their employer company at a future date and in a predetermined manner. The concept of ESOP evolved to make the employee feel one with the company she/he works for and align their interest with that of their company�s. Being a relatively new concept, many employees are still finding their way around here. This section is for the benefit of such employees (and others as well) who want to know about ESOP. As always, we have tried our best to be as clear as possible, but any queries are always welcome.

 

 


Q. What is an Employee Stock Option?

A. Employee Stock Option, or ESOP, is just what its name suggests � option to buy stocks (shares) for the employee. Your employer company, in an act of appreciation for your work, may give you the option of buying stocks or shares at a future date but at the rate determined at the time of rewarding you. Thus, if the value of your company�s stocks goes up, you benefit. But if it goes down, don�t worry. You can discard your option. There is no risk involved for you.

 

Q. Can ESOP be used for improving performance?

A. As aforementioned, ESOP enables the employee to buy shares in her/his firm. This in turn creates an environment of ownership and the employee is encouraged to think and act like an owner. Thus this would definitely improve individual as well as group performance. ESOP is often declared as a potent award in companies for employees performing exceedingly well.

 

Q. Why is an option valuable?

A. An option is valuable because unlike regular clients and shareholders, you have been given an option for purchasing shares. If the value of the company shares goes up, you can buy as many shares in accordance with the price determined at the time of the offer. However, if your company shares value go down, there is no need for you to buy shares. Remember the right conferred upon you is an OPTION, NOT AN OBLIGATION.

 

Q. What is the �option� in ESOP?

A. The option in ESOP is the commitment by the company to offer you part of their shares if you fulfil all the conditions mentioned in ESOP Plan.

 

Q. What is vesting?

A. Vesting period and vesting percentage are the two components of vesting. While the latter refers to the total options offered to you, the former refers to the period on the completion of which the said portion can be exercised.

 

Q. What is exercise?

A. Exercise or exercise of options is the activity of converting the options granted to you into shares after paying the required exercise price.

 

Q. What is exercise price?

A. As mentioned above exercise price is what you pay to convert your options into shares. Like if the price is Rs.10 and you want to exercise 50 options, then the exercise price becomes Rs.500/-

 

Q. What is exercise period?

A. ESOP is not a permanently available option. You have to exercise the same within the stipulated time period and this time period is called exercise period. This period starts from the day of vesting.

 

Q. What is the ideal time to exercise?

A. Exercising your options is a personal investment, and should be taken seriously. We advice you to get in touch with your financial advisor or CA for the market is subject to risks and no investment should be done in a haste or with half knowledge.

 

Q. What is lapse of option?

A. If you do not exercise your option within the specific time period, or in cases such as separation, abandonment etc., your options lose validity and this is known as lapse of option.

 

Q. If an employee has stock options, can it be taken as shares?

A. Please see � as an employee, you have stock �options�. Stock �options� are NOT the same as stocks/shares. While stock options can be converted to stocks/shares, they do not mean the same thing.

 
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