Valuation OF ESOP For Unlisted Companies

Valuation OF ESOP For Unlisted Companies

There is no established method or market price to determine the value, so valuing Employee Stock Options (ESOP) for unlisted firms can be challenging. 

Due to this, it is crucial to comprehend the various valuation procedures and techniques that may be used to estimate the ESOP's fair market value. 

This is crucial for unlisted businesses since they can have a different market transparency and data availability than listed businesses. 

The purpose of this article is to give a summary of the important ideas and elements that should be taken into account when evaluating ESOPs for unlisted firms.

What is ESOP?

Employee stock option plans are known as ESOPs. Companies provide their employees with the option to buy company shares at a reduced price as part of this sort of employee benefit scheme. 

To bring employee interests into line with those of the business, the ESOP is often given to employees as a form of remuneration. 

Employees can also do this to increase their business stock and participate in its expansion.


The private firm gains from ESOP Schemes in several ways. In particular, if employee pay is a concern. 

ESOP can provide private businesses with the following advantages over their rivals when it comes to hiring:

  • Recruit workers who might be valuable additions to the company.
  • Reducing attrition by the inclusion of rewards.
  • Freedom to direct money toward other objectives.
  • Direct workers toward the company's vision
  • enhancing employee retention.
  • Generates unsurpassed employee loyalty.


An essential factor in the success of the ESOP plan overall is determining the value of employee stock options (ESOP). 

This value aids the business in tracking the costs associated with paying workers' benefits and is also used to determine the perquisite tax that they must pay. 

Get an appropriate valuation of the ESOPs to make sure the ESOP plan is as successful as feasible.


Companies require ESOP value for both accounting and tax reasons. During the vesting period, the company issuing the ESOPs is required to record the compensation expenses. 

Additionally, ESOP values aid in calculating the perquisite tax that employees of the corporation must pay. 

The company's earnings per share (EPS) are reduced as a result of the higher compensation costs, and the ESOP plan is unfavourable due to excessive tax obligations. 

As a result, careful ESOP planning is required, and ESOP valuation is essential in this situation.


In India, the valuation of Employee Stock Options (ESOP) plans is crucial to the overall plan's effectiveness. 

Given the regulatory context, it is important to understand who is involved in the valuation process.

Independent Appraiser: To calculate the fair market value of the plan sponsor and the share price for ESOP-owned shares, the ESOP trustee hires the services of an independent professional appraiser. 

The appraiser must not be influenced by the company or its investors in any way, and the trustee's final decision on valuation is based on the appraiser's recommendation.

Trustee: A trustee is responsible for monitoring all plan participants as the shareholder of record and owes a fiduciary duty to them. 

The trustee acts as the main representative of an employee trust and is liable for any claims related to the share price of the ESOP. 

The trustee works closely with the plan sponsor's legal and financial professionals in the implementation of the ESOP plan document.

Labour laws and regulations control ESOPs in India. Companies must understand who is engaged in the ESOP valuation process to ensure compliance with these requirements. 

The appropriate government bodies supervise the execution of ESOP programmes to guarantee that valuations and operations are carried out fairly and properly. 

These organisations are critical in guaranteeing the preservation of employee rights and the effective operation of ESOPs throughout the country.


To implement an ESOP, an independent valuation is necessary. When a corporation sells its shares through an ESOP to an employee trust, the trustee appoints an independent and unbiased valuator to assess the fair market value (FMV). 

The ESOP trustee and plan sponsor will negotiate the final selling price using the ESOP value.

Understand why determining FMV is crucial first - In the subject of taxation, determining FMV is critical. Donors donating real estate to charities, for example, receive tax credits for the value of their gift. 

Tax authorities must certify that the credit granted is for the FMV of the donated object and often request independent values from donors. 

Applying fair market value to taxes correctly eliminates future financial troubles or fraud accusations. 

When assets are transferred or sold, FMV is also necessary. Assume a retiree sells his firm's shares to his children for $0.5 for them to continue operating it. However, the price is significantly lower than the FMV.

Calculate ESOP FMV - There are a few common methods for calculating FMV. When a corporation sells shares to an employee trust through an ESOP, the trustee appoints an independent valuator to assess the fair market worth of the company (FMV). 

The valuation is used to determine the final selling price. The corporation provides new shares to the employee's trust and is rewarded based on the fair market value. 

An impartial evaluation determines the corporate income tax advantage after the issue. 

Once an ESOP is established, an unbiased evaluator will evaluate the plan sponsor on an annual basis. 

This appraisal determines the value of employee shares. When employees retire or depart, the company buys back their vested shares.


Section 409A specifies the regulations that must be followed and the conditions that must be met before shares or options can be granted. 

It was implemented in reaction to the significant pricing manipulations that large corporations participated in throughout the 1990s and early in the current decade. 

These companies frequently exploited the previous method of internal value setting. The 409A valuation ensures appropriate federal income taxes are paid on deferred compensation schemes. Still, it also ensures that the IRS safe harbour covers stock options. 

Discounted Cash Flow (DCF) - A DCF is a financial model that estimates a company's future cash flows. To present value risk-adjusted cash flows, the approach applies a discount rate or the weighted average cost of capital. A DCF valuation includes assumptions about a company's future performance, tax rate, debt-to-equity ratio, and market value.

Public market comparables - This method evaluates related companies using financial data from public corporations and expert coverage. Because of size, diversity, and complexity variations, public market values are only sometimes appropriate for private firms.

This technique evaluates a company based on recent, industry-specific mergers and acquisitions. Comparing transaction pricing between companies has certain limitations. Transaction data from private companies are usually kept private.


Intrinsic Value Calculation

Intrinsic Value is the amount by which the share's market price exceeds the option's exercise price. In other words, "intrinsic value" refers to the profit that employees receive as a result of the increased market value of their shares.

The Fair Value Approach

The fair value of an ESOP is determined using option-pricing methods like the Black-Scholes or Binomial models. The Black-Scholes model is often used to determine the fair value of ESOPs by taking into consideration numerous aspects such as the Time Value of Money, Interest Rate, Volatility, Dividend Yield, and so forth.


Businesses may be required to conduct additional due diligence in the course of the appraisal process when it comes to ESOP value.

 The appraiser, trustee, and the business assessing to establish the value must all communicate clearly during this process. 

A month or more may pass between the initial inquiry and the final evaluation.

Typical due diligence inquiries that could be put to the corporation include the following as examples:

  • Five-year predictions, along with operational data relevant to them
  • Unsolicited offers for mergers and acquisitions
  • Financial statements from the past that have been audited or examined
  • the year's worth of internal financial reports
  • Most recent third-party valuation reports
  • Business valuation is critical for both initial ESOP transactions and ongoing plan operations. The total plan capital value will be disclosed in a sponsor's IRS Form 5500 submission. They are open to DOL examination even if the full ESOP values are not made public.


Employee stock ownership plans (ESOPs) for unlisted firms must be valued using a complicated method that takes into consideration several financial and non-financial aspects. 

This might include, among other things, the financial performance of the business, market circumstances, business trends, and managerial calibre. 

The fair market value of the company's shares, which is subsequently used to calculate the value of the ESOP, may be established with the aid of a detailed investigation of these variables.

With Especia, you may get dependable and accurate property values. Our staff of knowledgeable valuers is here to assist you in making wise choices. To arrange your appraisal, get in touch with us immediately.

FAQs related to Valuation of esop for unlisted companies

1. What does ESOP value for privately held enterprises serve?

The goal of ESOP valuation for unlisted enterprises is to determine the fair market value of the company's equity. With the use of this data, it is possible to compute the value of the ESOP for employees, which can be used to assess the potential advantages and dangers of taking part in the plan.

2. What elements are taken into account when ESOPs for unlisted firms are valued?

The financial success of the firm, market circumstances, industry trends, and management calibre are all considered when appraising ESOPs for unlisted companies. The process utilised to value the ESOP can also affect the outcome.

3. Can an ESOP's worth alter with time?

An ESOP's value might alter over time in response to changes in the company's financial performance, market circumstances, and other variables. To ensure that the ESOP's value accurately represents the current situation of the business, it is crucial to reassess it periodically.

4. Is hiring a qualified valuation agency for ESOPs for privately held businesses required?

Using a professional valuation agency for ESOPs for unlisted companies is frequently advised; however, it is optional. This might make it possible to guarantee that the value is correct and represents the business's current health, which can be crucial for both the firm and its employees.

4. What are the advantages and disadvantages of joining an ESOP for unlisted companies?

Increased employee motivation and engagement and the chance to share in the company's success are all possible advantages of taking part in an ESOP for unlisted firms. Participating in an ESOP, however, has certain possible hazards, such as the possibility of stock price volatility and business performance concerns. When considering whether to participate in an ESOP, it is crucial to weigh these issues carefully.

Contact Us for Startup Valuation Services ,Business Valuation Services ,ESOP Valuation Consultants,Fund Raising Valuation , Valuation Services , Internal Audits Services  in Delhi, Noida, Gurgaon, and all across India: write to us at Or Call On :(+91)-9711021268 +91-9310165114

- Share this post on -

Especia in news