What is ESOP?

Employee Stock Option Plan or Employees Stock Ownership Plan (ESOP) is an employee benefit plan with an intention to provide ownership interest in the company. The rationale behind such a benefit is to motivate employees and make them feel as part of business. ESOPs or SARs are effective tool for incentivizing the employees and used by both start-ups and matured companies. Compared to direct monetary benefits, ESOP is more cost effective and beneficial for employees.

What is SAR?

Stock Appreciation Right (SAR) is a method to pass on the financial benefit to employees, if the company performs well. Unlike ESOP, in SAR no option or shares is allotted and employees need not purchase the shares. SAR typically provide the employee with a cash payment based on the increase in the value of shares over a specific period of time.

In the backdrop of covid, many companies face financial crises and struggle to retain talented employees. ESOP / SARs are one of the best options to retain employees which gives financial benefit to employees with low impact of cost.
  • Revisiting employee retention policy & benefits
  • Non finanical, employees benefit scheme

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Advantages of ESOP / SAR

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  1. Tax benefits: SAR (payment) and ESOP (Contributions of stock) are tax deductible subject to compliance of necessary statutory regulations and compliance.
  2. Less cash outflow: In ESOP, there is no outflow of cash, rather the company will get a nominal value exercise price. There is only operational cost to complete the ESOP.
  3. Tool of motivation: ESOP or SAR ensures employees contribute for development of the company and value creation.

4. Retention rate: Generally, ESOP or SAR will be available to exercise after few years of grand of option, if any employee resigns during the exercise period it get cancelled. This encourage employees to serve for long period.

5. Tax benefit for employees: In case of start-up employees under ESOP scheme, it would be taxed on earliest of any one :

  • After forty-eight months from the end of the relevant assessment year in which ESOP or sweat equity shares were allotted or
  • When the shares are sold by the employee or
  • When the employee leaves the organization.

Start your ESOP & SAR Services with us and Grow with us

Truzly helps you to design and develop a tailor-made employee benefit scheme (ESOP or SAR) for your organization to attain the desired result and it goes beyond the tool of monetary incentivization. Each organization is unique and our experts will support you from designing, ESOP planning, documentation, tax advisory till valuation and completion. We ensure transparency and build mutual trust among employer and employee. Go with expert, go with Truzly, no one understand ESOP and its legal aspects, better than us.

Truzly professionals are ready to serve you for ESOP, SAR and gamut of services

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  • ESOP & SAR structuring & implementation #1
  • Documentation and legal support #2
  • Tax advisory services #3
  • Employee support #4
  • Valuation service #5
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Note:

  1. Truzly provides customized scheme based on your business, organization structure and financial goals.
  2. ESOP or SARs are regulated and proper documentation plays vital role in success. Truzly supports end to end documentation and legal support.
  3. Huge tax benefits are available for both employer and employee under ESOP or SAR. Truzly’s expert help you to optimize tax saving and balance financial benefit and compliance.
  4. We never stop from organization level alone, Truzly ensures its services reach every employee and educate them on ESOP or SAR benefit.
  5. We support you in ESOP option valuation from IBBI registered valuers, financial experts.

FAQ’s and Useful insights on ESOP & SAR:

No. The organization can decide and issue ESOP or SAR benefit to certain level of employees. E.g. if a company decided to provide the benefit only to employees above the grand of Senior Manager and above, it is possible.
No. ESOP can be issued by private company if the employer decided to provide certain stake in the form of ESOP. In later stage, the Company can buy-back the shares allotted under the ESOP which gives financial benefit to the employees.
The price of the stock in an ESOP is determined by a qualified IBBI registered valuer. These valuers are recognized under Companies act for valuation. The value is based on many factors, including the company’s current and projected performance, the performance of similar publicly traded companies, the outlook for the industry and the geography within which the company operates, and the overall economic outlook.
Generally, under SARs employees need not pay to the company for exercising the option unlike ESOP. Hence options are not allotted. Once a SAR vests, an employee can exercise it at any time prior to its expiration. The proceeds will be paid in cash or any combination depending on the rules of an employee’s plan.
Many banks and financial institutions provide loan to employees for acquiring the ESOP options with certain percentage of interest. Employees can repay the loan after the option get exercised, sell the same in open market. Employees’ benefit from the difference between the sale value and acquisition value.
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