Definition
ESOP
An ESOP (Employee Stock Option Plan) gives employees the right to buy company shares at a fixed price in the future, as a form of reward and retention.
Under an ESOP, employees are granted options that vest over time; once vested, they can be exercised to buy shares at the pre-set exercise price, often well below market value. This aligns employee incentives with shareholder value, especially in startups.
In India, ESOP gains are taxed: the difference between exercise price and fair market value is taxed as a perquisite (salary) at exercise, and any further gain is taxed as capital gains at sale. Large ESOP pools dilute existing shareholders, so investors watch the outstanding option count.
Related terms
- Sweat EquitySweat equity is shares issued to founders or employees in recognition of their know-how, intellectual property or value addition, rather than cash.
- Preferential AllotmentPreferential allotment is the issue of shares or convertibles by a listed company to select investors on a private basis, subject to SEBI pricing rules.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.