Employee Stock Ownership Plan (ESOP): What It Is, How It Works

1. The company sets up a trust fund and contributes shares of its stock to it.
2. Employees are granted shares in the trust fund, typically over a period of time.
3. The shares vest over time, meaning that employees gradually gain ownership of them.
4. Once vested, employees can sell their shares back to the company or trust fund at fair market value.
5. Employees typically do not have to pay for their ESOP shares, or they may get them at a discount. This is why ESOPs can be a valuable employee benefit.

Example of Working of ESOPS

1. A company sets up an ESOP and contributes 10% of its shares to the trust fund.
2. Employees are granted shares in the trust fund based on their salary and years of service.
3. The shares vest over 4 years, meaning that employees gain 25% ownership of their shares each year.
4. After 4 years, employees can sell their vested shares back to the company or trust fund at fair market value.
5. If the company's stock price has increased during the 4 years, employees can make a significant profit by selling their shares.

ESOPs can benefit both employees and employers. Employees can gain ownership in the company they work for, which can lead to financial rewards if the company is successful. Employers can use ESOPs to attract and retain top talent, and to incentivize employees to focus on the company's long-term success.

Stages For Granting ESOPS

Stages involved in granting ESOPs in very short in layman's terms:

1. Company makes a plan: This includes who gets ESOPs, how many they get, and when they can sell them.
2. Board of directors approves the plan.
3. Shareholders approve the plan (if required by law).
4. Company grants ESOPs to eligible employees.
5. Employees wait for their ESOPs to vest (meaning they can sell them).
6. Employees choose to exercise their ESOPs (buy the shares at a set price).
7. Employees sell the shares (if they want to).

ESOPs can be a great way for employees to become owners of the company and share in its success. However, it is important to understand the terms and conditions of your ESOPs before you accept them.

Who Participants in ESOPS

1. Employees must be at least 21 years old.
2. Employees must have completed at least one year of service.
3. Employees must be non-highly compensated.
4. Some employees may be excluded, such as union employees, independent contractors, and leased employees.