When ESOPs are heard for the first time by any employee or a candidate at the time of receiving their offer letter, there are certain doubts and queries in their mind. Like - What are ESOPs? Are they the shares or a promissory note or a bond wherein we will receive a certain amount or a certain number of shares after a defined period of time? But most of the queries are left unanswered.
For this reason, let us understand what ESOPs is with a simple example here, and then we will correlate the same for you with the actual definition in the simplest possible way.
Your Employer promises you to give a Honda City (Equity Shares) at a discounted price of INR 2 Lakhs (Exercise Price) when the market price of the car is INR 15 Lakhs (FMV). But you will be eligible to receive a car after fulfilling some conditions (Vesting Conditions) or after some time period (Vesting Period), say 4 years of employment with the company.
So, if you will be in the company for 4 years then you are eligible to receive the Honda City Car at a price of INR 2 Lakhs when the market price of the same is INR 15 Lakhs. After 4 years the company will ask you to receive the Car and may also give you an option to sell it at a price of INR 20 Lakhs.
Options = Honda City Car
Exercise Price = INR 2 Lakhs (The Discounted Price)
Fair Market Value = INR 15 Lakhs (The Market Price of the car)
Vesting Period = 4 Years of Employment with the Company
Selling Price = INR 20 Lakhs. Perquisite Income = INR 13 Lakhs (Difference between FMV and exercise price)
Capital Gain = INR 5 Lakhs (Difference between Selling Price and FMV)
We hope we are able to solve your doubts here with the basic examples. For more information on ESOPs and their structure keep following our posts and schedule a demo with us.
If the company were a movie, the Cap Table would be the credits at the start and the end as to who had what part in the film. We have spoken about Cap Table quite a lot, but we still feel it is lesREAD MORE