Difference Between ESOPs and Equity | ESOP vs Equity

Difference Between ESOPs and Equity | ESOP vs Equity

ESOP vs Equity – The need and the differences.

A method of motivating employees and providing them with incentives a company is to issue them company shares. This method is a good way of retaining them for the long term as employees are one of the key factors for the success of a company or business.

There are two methods used by companies to issue shares to their employees. They are – Employee Stock Option Plan (or ESOP) and Sweat Equity Shares (or equity). Issuing shares is also a method for companies to increase their capital.

Let us look at the brief difference between ESOPs and equity: -

Employee Stock Option Plan (ESOP):

The ESOP scheme is defined under Section 2(37) of the Companies Act, 2013. The ESOP is an option provided to a company's employees, such as the directors or the officers of the company, with the benefit of purchasing or subscribing to the shares of the company at a predestined rate, calculated by predicting future data given to them. Companies issue ESOPs when they aim to increase their subscribed capital.

Sweat Equity Shares (Equity):

Equity shares are defined under Section 2(88) of the Companies Act, 2013. Equity shares that companies issue to their employees, such as the directors or the officers of the company, at a discount or non-cash consideration. This is to make rights available in the means of intellectual property rights or to provide know-how or any value additions in any form.

Below is a table highlighting the difference between ESOPs and equity.

Basis

ESOP

Equity

Nature

They are issued to the company’s employees as a form of incentive and retention plans. They don’t pose any obligations, and employees have the option to subscribe or not.

These are shares issued to the company's employees as consideration for them to provide intellectual property rights, know-how, or any value additions to the company.

Allotment

ESOPs are provided at a predetermined rate as an option, with employees having the choice to accept or reject them. They are only issued if the employee chooses to subscribe.

Equity shares are directly provided to the employees either at a discount or any other non-cash considerations.

Eligibility

  1. A permanent employee working in or outside India.
  2. A full-time or part-time director of the company. But not an independent one.
  3. A permanent employee or director in or outside India of a subsidiary company, a holding company, or an associate company.

Note: Employees belonging to the promoter group are not eligible.

  1. A permanent employee working in or outside India.
  2. The director of the company, full-time or not.
  3. A permanent employee or director in or outside India of a subsidiary company or a holding company.

Consideration

Its consideration is paid in the form of cash.

It is either offered at a discount which is partly cash or in any form other than cash.

Lock-in Period

The lock-in period is decided by the companies. As such, it has no predefined period.

The Companies Rules – Share Capital and Debentures state the lock-in period as three years.

Pricing Guidelines

The pricing guidelines are decided by the companies. As such, it is not predefined.

A registered valuer decides the pricing guidelines.

Restrictions

There are no restrictions on ESOPs by companies.

  • The company cannot issue equity shares of more than 15% of the already existing paid-up equity share capital in a particular year or shares of the issue value of Rs.5 crores, whichever is higher.
  • The issued equity shares in the company should not be more than 25% of the paid-up equity capital of that company at any time.

 

Let us now try to sum up the overview of ESOP vs equity, i.e., the difference between ESOPs and equity.

A basic difference between ESOPs and equity is that 'equity shares' can be defined as the ownership of a company, whereas 'the equity can be defined as the degree of that ownership and is represented by stock shares. A company will divide up its equity (ownership) into an arbitrary number of pieces. Each piece is one fractional share of ownership. For instance, if the company decides to break its ownership into ten pieces and you purchase one of those, you now own one share, representing 1/10th of the company's total equity.  

Sometimes, an enterprise can bypass the markets and issue shares directly to employees through an Employee Stock Ownership Plan (ESOP). ESOPs are those shares provided to the employees as an option by the company, directly purchased by employees, or in some cases, as a combination of them both.

Regardless of the method, the company's grant of partial ownership to the employee is intended to provide an incentive. Just as a property's owner is more careful with his property than a simple tenant will be, a company's owner-employees are more likely to contribute to the success of the company than an employee bearing no stake.

An ESOP is simply one non-market method of transferring equity in a company directly to an employee. There will be differences between ESOPs and equity in their timings, vesting, and other details. But all ESOPs attempt to instill that shared commitment in the enterprise's success to all who work at it.

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If you are looking for any Employee stock option plan ESOP services or consultants in Noida, Delhi, Gurgaon or anywhere in India, write to us at accounts@especia.co.in. Or Call On :(+91)-9711021268 +91-9310165114

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