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<ul><li>When exercising your ESOP options, you need to pay for the shares at the exercise price. </li><li>There may be an additional tax burden if the <keyword id="173739" type="General" weightage="20" keywordseo="esops" source="Orion">ESOPs</keyword> are provided at a value lower than the fair <keyword id="6463972" type="General" weightage="20" keywordseo="market-value" source="Orion">market value</keyword> at the time of vesting. </li><li>If the company fails to perform well, or lacks successful liquidity events, the potential returns on ESOPs may remain unrealised. </li></ul>When talking about the glitzy world of start-ups, a discussion on employee stock ownership plan (ESOPs), always comes up. In recent news Swiggy announced that it will buy back shares worth $50 million from employees. Also, Paytm granted 1.7 million new ESOPs to employees. A few weeks ago Flipkart announced a $700 million ESOPs payout. However, the world of ESOPs may not all be as rosy as it seems at first glance. ESOPs work in a certain way and there are a lot of factors which need to fall into place before an employee can make a profit out of them. Therefore, one needs to understand that with start-ups coming under a lot of pressure due to an uncertain economic scenario and a funding crunch, have ESOPs lost their charm? “ ESOPs are often offered to outstanding performers to foster a sense of ownership, and nowadays, start-ups use them as a means to attract and retain top talent. However, it is essential to be aware that some companies might also offer ESOPs to compensate for situations when they cannot offer competitive salaries,’ says Anjali Raghuvanshi, Chief People Officer, Randstad India, a HR consulting firm. What this essentially means is that when taking up a job offer, do note if ESOPs are a part of the salary package as this may come at the cost of foregoing some salary. It is important to understand two major risks associated with ESOPs. Let us take a look. <cmsannotation type="cmsannotation" annotationid="You would need to fork out money upfront" comment="subhead" text="You would need to fork out money upfront">You would need to fork out money upfront</cmsannotation> Here is where owning ESOPs can get tricky. “There are two up-front costs you have to bear when you are exercising your ESOP options. The first cost is the amount you pay the company for those ESOPs,” says BM Singh, ESOP Expert &amp; Managing Partner, BMSA, a consulting firm. Suppose an employee is granted 1,000 ESOP options by a company. The exercise price or strike price of each option is ₹100. This means that the employee can purchase the company's shares at ₹100 per share at a future date, regardless of the market price at that time. Now, let's assume that the market price of the company's shares increases to ₹150 when the employee decides to exercise their ESOP options. To exercise the options, the employee needs to pay the exercise price, which is ₹100 per share. The cost to the employee to exercise their ESOP options would be ₹100,000. <cmsannotation type="cmsannotation" annotationid="Additionally, there may be a tax implication" comment="subhead" text="Additionally, there may be a tax implication">Additionally, there may be a tax implication</cmsannotation> The next is the tax implication that arises here. If the ESOPs are granted at a value lower than the fair market value during vesting, there could be an extra tax burden, resulting in potential tax liabilities before fully realising the value of the ESOPs. “ESOPs are taxable in the hands of the employees as perquisite u/s 17(2) of the IT Act. The taxable amount of such perquisite would be the fair market value (FMV) of the shares (computed in accordance with Rule 3(8) of the IT Act) on the date of exercising such option less any amount paid by the employee for such ESOPs,” says Suresh Surana, Founder, RSM India, an audit, tax and consulting firm. In the above example, the employee would need to pay tax on the taxable amount of ₹50,000 at the applicable tax rate. The exact tax amount will depend on the individual's income tax slab rate. <cmsannotation type="cmsannotation" annotationid="A bigger concern" comment="subhead" text="A bigger concern">A bigger concern</cmsannotation> Poor company performance and uncertainty of liquidity events may render ESOPs worthless. “If the company fails to perform well or lacks successful liquidity events, the potential returns on ESOPs may remain unrealised, potentially impacting the value of the effort and time invested over the years, “ says Raghuvanshi. The value of ESOPs is closely tied to the company's performance and growth potential. If the company's value decreases, it can negatively impact the value of your stock options, potentially making it challenging to sell your shares at a profit. Hence, it is important for an employee to evaluate the future prospects and growth of a company before making a decision to exercise the option. When an employee exercises the options, he should have trust in the company's future growth and performance. “The employee should also be aware about the exit possibilities in case of unlisted shares i.e. buyback track record, funding rounds etc,” says Akhil Chandna, Partner, Tax, Grant Thornton Bharat, a professional services firm. When exercising ESOPs, it is thus essential to conduct a thorough assessment of the company's current performance and financial well-being. This evaluation helps the employee make informed decisions about exercising their options. “Any significant changes since joining could impact the decision,” says Raghuvanshi. <cmsannotation type="cmsannotation" annotationid="Risk of ESOPs are higher in an early stage start-up" comment="subhead" text="Risk of ESOPs are higher in an early stage start-up">Risk of ESOPs are higher in an early stage start-up</cmsannotation> If a start-up is bootstrapped or in the idea phase, the risks are higher. In that case ESOPs are merely paper money. As the different rounds happen, the value of the ESOPs and the probability of liquidity increases. “You should see at which stage of the start-up you are entering. At each phase the value of ESOPs is different. So if you are joining a company just on the basis of ESOPs and not getting a reasonable salary and the company is in its early stages, then you should also focus on the cash component,” says Singh. If it has reached the Series A or Series B funding stage, then you can consider the value of ESOPs when joining and can consider it an important part of your salary package.

Explained: What accepting ESOPs, especially if joining a start-up, might entail

<ul class="summary-list"><li>An employee stock ownership plan provides employees with shares of a company, which makes them part owners.</li><li>Most ESOPs grant employees shares outright instead of requiring them to contribute to the plans.</li><li>ESOPs help employees save for <keyword id="11909870" type="UNKNOWN" weightage="60" keywordseo="retirement" source="Orion">retirement</keyword> while providing the company tax benefits and fostering overall growth. </li></ul>If you're looking to work for a company that values employees and gives you a real stake in its success, you might want to check out those that offer an employee stock ownership plan (ESOP). An ESOP is a retirement program that makes employees part owners of the company. The <a href="https://www.esop.org/" target="_blank" rel="noopener">National Center for Employee Ownership</a> (NCEO) estimates that more than 14 million people participate in 6,600 ESOPs nationwide. While some publicly traded companies offer ESOPs, the plans are more common among privately held employers. Here's a closer look at how ESOPs work and the advantages you could get by working for a company that provides this kind of benefit.<h2>How does an ESOP work? </h2>An ESOP is basically a trust fund a company establishes to purchase shares of stock from existing stockholders. Those shares are then allocated into accounts designated for individual employees, usually aligned with a percentage of their salary. The shares accumulate in the account until the employee retires, leaves the company, or some kind of special circumstance occurs, such as death or disability.Employees usually don't put any money into an ESOP. In most cases, the employer makes all contributions.Workers cash out by selling shares on the market or back to the employer. ESOPs are regulated under the <a href="https://www.dol.gov/general/topic/retirement/erisa" target="_blank" rel="noopener">Employee Retirement Income Security Act</a> (ERISA). Privately held ones must have company stock independently appraised for its fair market value at least once per year. "The appraisal firm needs to use at least three methods to come up with a fair market value for the stock and the employees," says Loren Rodgers, executive director for NCEO. "When they leave [or] when they pull stock out of the ESOP, [the employee] needs to get at least that fair market value."Quick tip: Rodgers says companies with ESOPs contribute an average of 9% of their payroll into the programs annually, while employer contributions to 401(k) plans are closer to 4%, meaning ESOPs could provide more "free" money toward your retirement goals.Be careful not to confuse ESOPs with employee stock option plans, which give workers a chance to purchase shares in the company at a specified price within a fixed window of time, providing the chance to acquire them at a discount to the market price. Most ESOPs grant shares of stock to employees outright. In that case, if the value of those shares never rises, or even falls, the employee hasn't lost anything by participating. The same is not always true for stock options. "With stock options, employees pay cash for the stock either directly with cash on hand or indirectly by exercising the option and immediately selling enough shares to cover the exercise price," explains Elliot Raff, Of Counsel at <a href="https://keightleyashner.com/" target="_blank" rel="noopener">Keightley and Ashner LLP</a>. "In an ESOP, employees 'buy' the stock allocated to their ESOP accounts by virtue of being and remaining employed and thereby becoming vested."Finally, Raff says ESOPS are subject to non-discrimination rules under ERISA and Internal Revenue Service regulations about annual limits on the value of allocations. Stock option plans are not, allowing companies to set their own rules for who benefits from this kind of program and how it will work.<h2>What are ESOP tax advantages?</h2>ESOPs offer tax advantages for both employers and employees. Contributions to an ESOP are tax deductible, and if a shareholder sells their stock to the ESOP, they may be able to avoid or defer paying capital gains taxes. "A selling shareholder may be able to defer capital gain on the sale to an ESOP," says Peter Jones, an attorney with <a href="https://www.tuckerellis.com/" target="_blank" rel="noopener">Tucker Ellis LLP</a> specializing in ESOPs. "That occurs if the company is taxed as a C corporation, the seller sells at least 30% of the outstanding stock to the ESOP, and the seller then invests in qualified replacement property (generally, securities offered by American-operating companies)." If an S corporation has an ESOP, earnings attributable to shares in the plan are not taxable. "Profits that are attributable to stock held by the ESOP 'pass-through' to a qualified retirement plan, and the ESOP pays no federal income tax, and even no state income tax in most states," Jones says. "If the ESOP owns 100% of the stock, neither the company nor the ESOP pay any federal or, in most instances, state tax."For employees, they get to invest in their retirement without paying taxes on the value of that money until they take distributions. To further delay paying taxes on ESOP earnings, they may also be able to sell their shares and roll over that money into an IRA or 401(k) account.<h2>How do ESOP distributions and payouts work? </h2>ESOP distributions work a little differently from other retirement plans and can vary from company to company. According to NCEO, <a href="https://www.nceo.org/articles/esop-participant-distribution-rules" target="_blank" rel="noopener">some general rules</a> that apply to most plans include:<ul><li>Distributions must begin the plan year following retirement age, death, or disability. </li><li>If you quit or are fired from your job, you can begin receiving distributions no later than six years after the plan year during which you leave has ended. </li><li>If the ESOP took out a loan to purchase shares you wish to collect on, distribution may be delayed until the loan is paid in full. </li><li>Shares can be distributed in a lump sum or over time in "substantially equal payments that are made no less frequently over annually over a period of not more than five years."</li></ul>ESOP participants may also be subject to vesting schedules. Rodgers explains that ESOPs have two options for vesting. The first is to grant 100% vesting once an employee completes three years of service, with none before then.The second is to grant 20% vesting every year starting in an employee's second year of service. ESOPs can choose any method to vest employees faster, but can't use a vesting schedule that would take longer. Companies with ESOPs are required to repurchase stock when an employee retires or leaves the company. However, Rodgers says private companies are only required to do so for two years following an event that qualifies for distribution. Most people cash out in the first year because after the second, there's no guarantee someone will buy their shares. If someone quits or is fired, they usually won't be able to cash out their ESOP shares right away. Federal law gives ESOPs as long as five years to distribute shares in these cases.Note: A 2021 NCEO study found 56% of companies with ESOPs also offer additional retirement plans. <h2>What are the pros and cons of ESOPs </h2>ESOPs provide a lot of benefits both for employers and their workers. But they might not be right for some companies, and there are some limitations to accessing the money that employee participants should consider. Here is a look at some of the pros and cons of ESOPs. <table style="border-collapse: collapse; width: 100%; height: 369px;" border="1"><tbody><tr style="height: 22px;"><td style="width: 50%; height: 22px;">Pros</td><td style="width: 50%; height: 22px;">Cons</td></tr><tr style="height: 347px;"><td style="width: 50%; height: 347px;"><ul><li>Retirement accounts grow without employees having to divert a portion of their pay.</li><li>Companies can take advantage of tax deductions and reduction in tax liability.</li><li>Shareholders can defer paying taxes on the sale of shares to the ESOP.</li><li>Companies with ESOPs tend to grow faster than they would be expected to before adopting the program.</li><li>Owners can build a legacy for the business they created and divest their interests in their own time.</li></ul></td><td style="width: 50%; height: 347px;"><ul><li>Capital gains taxes will be due on the appreciation in the share value.</li><li>They aren't always good for startups or struggling companies.</li><li>All your retirement eggs are in one basket and depend on company success to pay out.</li><li>You could lose money if the market value of the shares go down by the time you start collecting distributions, though you didn't invest actual cash to purchase shares.</li><li>Companies need to have an outside administrator for the program and annual independent evaluation of stock values.</li></ul></td></tr></tbody></table><h2>The financial takeaway</h2>ESOPs are generally beneficial for both companies and employees. They can foster a strong employee-owner culture that values training, education, innovation, and finding creative solutions. Working in this kind of environment can be very rewarding. Business owners can use an ESOP to establish a legacy for their company when they're ready to take a step back or even sell. The financial benefits for the business often outweigh the expenses, though ESOPs tend to work best for large companiesAn ESOP can be a very strong component of a retirement strategy. However, it's important to remember that they are entirely focused on the stock of a single company. Diversification is key when it comes to long-term investment, so it's a good idea to look into additional options, such as IRAs or 401(k) accounts as part of your bigger retirement plan. <a data-type="618407b41734c745130c1261">A guide to IRAs: Tax-advantaged investing accounts that help you save for retirement</a><a data-type="6182eaf71734c753865ecff0">Profit-sharing plans: Retirement accounts that give employees a percentage of a company's profits</a><a data-type="618065ddd17eda70db54a51c">457 plans: The retirement option for nonprofit and government workers</a><a data-type="615ca5bdea58a4786b42bcef">What to know about SIMPLE IRAs: Retirement accounts for small businesses and their employees</a>

An employee stock ownership plan is a retirement benefit that makes workers part owners of the company

Google-backed government job preparation platform Adda247 on Monday said it has granted stock options worth ₹150 crore under its employee stock ownership plan (<keyword id="120103" type="General" weightage="80" keywordseo="esop" source="Orion">ESOP</keyword>) programme to its workers. The ESOP policy currently has a vesting period of four years and aims to reward exceptional talent while continuously valuing employees, the company said in a statement. "The entire purpose of ESOP policy is also to give priority and importance to our employees. Eventually, we want to generate wealth for all our employees with the dream to create at least a hundred crorepatis from our employees prior to our IPO," said <keyword id="1083572" type="General" weightage="80" keywordseo="anil-nagar" source="Orion">Anil Nagar</keyword>, Founder &amp; CEO of Adda247. Adda247 first launched its ESOP policy in 2016 and has rewarded around 10 per cent of its workforce across levels to date. "We as an organisation are committed to building a solid long-term business for our employees as they are our biggest asset," said <keyword id="352238" type="General" weightage="80" keywordseo="saurabh-bansal" source="Orion">Saurabh Bansal</keyword>, <keyword id="5393912" type="General" weightage="80" keywordseo="cofounder-coo" source="Orion">CoFounder COO</keyword>, Adda247. Adda247 caters to nearly 80-100 million government job aspirants across the country in 12 vernacular languages. The company recently acquired the UPSC-focused ed-tech platform, StudyIQ Education. Adda247 currently has 22 million monthly active users, and a total of 2 million paid users. The platform recently raised $35 million from marquee investors like <keyword id="6355629" type="General" weightage="100" keywordseo="google" source="Orion">Google</keyword>, WestBridge Capital, Infoedge and Asha Impact. SEE ALSO: <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/business/startups/news/wework-india-raises-550-cr-from-bpea-credit-managed-fund/articleshow/96510858.cms">WeWork India raises ₹550 cr from BPEA Credit-managed fund</a> <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/business/auto/news/best-7-seater-cars-under-15-lakh-scorpio-n-ertiga-carens-and-more/slidelist/96512128.cms">Best 7-seater cars under ₹15 lakh – Scorpio N, Ertiga, Carens, and more</a>

Google-backed Adda247 grants ESOPs worth ₹150 crore to employees

<ul class="summary-list"><li>Bob's Red Mill became employee-owned in 2020 with an Employee Stock Ownership Program or ESOP.</li><li>CEO Trey Winthrop said when founder Bob Moore died, the ESOP helped with the transition.</li></ul>When 94-year-old <a target="_blank" class="" href="https://www.businessinsider.com/bob-moore-bobs-red-mill-founder-employee-owned-company-2024-2">Bob Moore</a> died in February, Bob's Red Mill not only lost its founder but also the face of the company, literally — he's on every package.But in 2010, the natural foods company initiated a process that would help prepare it for Moore's eventual passing. Moore, who founded the whole-grain food company in 1978 and turned it into a global empire, decided to transfer ownership to its more than 700 employees. By 2020, Bob's Red Mill was entirely employee-owned."By becoming 100% employee-owned, we knew that when Bob passed that we would control our future," Trey Winthrop, the company's CEO since 2022, told Business Insider. "I didn't have to think about external problems. I got to focus internally on all the people here and how we were going to grieve together."Moore said he frequently fended off large corporations that wanted to buy them out. But because of the employee-ownership program, Winthrop, who has worked at Bob's Red Mill for 17 years, said he did not have to worry about an external threat coming in and trying to buy up shares.Bob's Red Mill is one of about 6,500 American companies that operate with an Employee Stock Ownership Plan, or ESOP, according to the <a target="_blank" rel=" nofollow" href="https://www.nceo.org/articles/employee-ownership-by-the-numbers#:~:text=Employee%20Stock%20Ownership-,How%20Many%20ESOPs%20Are%20There%3F,assets%20of%20over%20%242.1%20trillion.">National Center for Employee Ownership</a> (NCEO). The largest majority employee-owned company in the US as of November is Publix, a Florida-based supermarket chain with more than 225,000 employees, according to the NCEO. <div type="image" title="Man smiling in suit jacket" height="4016" width="6016" msid="115314190" hostid="261" sizebytes="1535308"></div>When an ESOP is formed, ownership shares are distributed to employees, giving them a financial stake in the success of the company. When an employee retires, the company buys back those shares at market price within a set number of years. ESOPs, which are technically retirement plans, are governed by some of the same laws that apply to 401(k) plans, according to <a target="_blank" class="" href="https://www.esopassociation.org/what-is-an-esop">The ESOP Association</a>.Though financial equity is important, Winthrop said it's not really the reason people join ESOPs, adding that the real benefit comes from how being employee-owned impacts the company culture."We own our jobs. We don't rent them," he said, calling it the company's "guiding principle."<h2 id="7f0e4967-61a2-478a-a33a-27994ffb7976">ESOPs boost employee engagement and can lead to hefty payouts</h2>Winthrop, who was at Bob's Red Mill long before the ESOP, said being employee-owned boosts employee engagement and retention. He said it creates a two-way street of communication, where the company can share financials with employees and workers are given a voice, in part through being active in committees."It's really getting people engaged culturally so they understand what success is, and then getting them juiced about that equity once they understand how they can grow it," he said.As a CEO, Winthrop said he thinks being employee-owned actually makes his job easier as it creates a higher level of trust between him and other employees.Having an ESOP does not prevent a company from being sold. But it can ensure that if the board does choose to sell it, for instance, employees will share in the profits, Winthrop said.When Clif Bar sold to food giant Mondelez for $2.9 billion in 2022, the company was 20% employee-owned, which amounted to $580 million shared among 1,300 people — an average payout of $488,000 per employee.But rather than think of an ESOP as a retirement tool, Winthrop said it's better thought of as an employee engagement tool. Still, he said it might not be for everyone."If you're trying to maximize your price when you're selling your company, an ESOP doesn't always pay top dollar," he said, but, "if you have employees that you believe in and you want them to be part of the financial success of their work and promote the middle class, then you should heavily look at being an ESOP."Have a news tip or a story to share? Contact this reporter at <a target="_blank" href="mailto:kvlamis@businessinsider.com">kvlamis@businessinsider.com</a>.

Bob's Red Mill is owned by its 700 employees. Its CEO says that is key to its success.

Market regulator <keyword id="19901201" type="General" weightage="100" keywordseo="Sebi" source="keywords">SEBI</keyword> has issued notice to fintech firm <keyword id="20253123" type="General" weightage="20" keywordseo="One97-Communications" source="keywords" meta.keywordsubtype="org" meta.entityname="One97 Communications" meta.hostid="261" meta.entityid="One97 Communications">One97 Communications</keyword>, which owns the <keyword id="19898109" type="General" weightage="20" keywordseo="Paytm" source="keywords">Paytm</keyword> brand, for the employee <keyword id="20410988" type="General" weightage="20" keywordseo="stock-options" source="keywords">stock options</keyword> (<keyword id="20043663" type="General" weightage="20" keywordseo="ESOPs" source="keywords">ESOPs</keyword>) allocated to MD and CEO <keyword id="20004114" type="General" weightage="20" keywordseo="vijay-shekhar-sharma" source="keywords">Vijay Shekhar Sharma</keyword>, according to the company filing on Monday. In response to a query from stock exchanges, Paytm said the notice is not a new development, and it is in regulatory contact with the market regulator to make required representations. According to Paytm's financial year 2024 annual result filing, it had issued 2.1 crore employee stock options (ESOP) to Sharma in the financial year 2022. SEBI had issued a show cause notice to Paytm on ESOP issued to Sharma. "This is not a new development, as the Company had already made relevant disclosures on this matter in its financial results for the quarter and year ended March 31, 2024, as well as the quarter ended June 30, 2024. The Company is in regular communication with the <keyword id="19970553" type="General" weightage="20" keywordseo="securities-exchange-board-of-india" source="keywords">Securities Exchange Board of India</keyword> (SEBI) and making necessary representations regarding this matter," Paytm said in response to a stock exchange query. The disclosure made on May 22 and July 19 said that Paytm has submitted its preliminary response and is in the process of seeking further information from the regulator in this regard. "Based on an independent legal opinion obtained by the management, it believes that the Company is compliant with the relevant regulations. Accordingly, there is no impact on the financial results for the year ended March 31, 2024," the filing said. Shares of One97 Communications Ltd, which owns the Paytm brand, on Monday dropped over 4% amid reports that SEBI has issued show-cause notices to Vijay Shekhar Sharma and board members who served during its IPO in November 2021 for alleged misrepresentation of facts. The stock tanked 4.41 % to settle at Rs 530.05 apiece on the BSE. During the day, it plunged 8.88 % to Rs 505.25. On the NSE, shares of the firm dropped 4.47 % to Rs 530. Intra-day, the stock tumbled 8.88 % to Rs 505.55. The company's market valuation declined by Rs 1,534.23 crore to Rs 33,731.56 crore. Earlier in the day, BSE sought clarification from One 97 Communications Ltd with reference to news that Vijay Shekhar Sharma, Paytm directors face SEBI show-cause notices over initial public offering (IPO) breaches, particularly on ESOPs allotted to MD and CEO Vijay Shekhar Sharma. In response to a query from stock exchanges, Paytm said the notice is not a new development, and it is in regulatory contact with the markets regulator to make required representations.

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Explained: What accepting ESOPs, especially if joining a start-up, might entail

Anagh Pal

An employee stock ownership plan is a retirement benefit that makes workers part owners of the company

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Google-backed Adda247 grants ESOPs worth ₹150 crore to employees

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Bob's Red Mill is owned by its 700 employees. Its CEO says that is key to its success.

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SEBI issues notice to Paytm on ESOPs given to CEO Sharma; firm says disclosure already made

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