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Guide to Employee Stock Option Plans (ESOPs)

by Costi Milchi • Aug 28, 2023 • 6 minute read

  

Welcome to our guide on Employee Stock Option Plans (ESOPs), which will provide you with a detailed understanding of this interesting form of employee compensation and ownership. Although we may not cover all the details you may need for your specific company and situation, rest assured that we're here to provide you with a solid foundation to embark on your ESOP journey.

1: What is an Employee Stock Option Plan (ESOP)?

An ESOP is a structured compensation scheme offered by companies to employees. By being part of your company’s ESOP, you get the option to purchase company shares at a predetermined price, so that in the end you may own a piece of the company you are working for. The primary motivation behind ESOPs is to ensure that you and your company have the same goals and try to achieve the same results.

You could find more information here

 

2: Is ESOP better for me than receiving a cash bonus?

Well, as always, there are advantages and disadvantages to every situation. Although you may prefer one or the other, typically your company will decide on a specific mix of ESOP and cash bonuses for employees, and you may not be able to change this. What you could definitely do is to change your activity in the company to reach one or another of the goals tied to these types of rewards.

 

3. What should I expect if my company has an ESOP?

If your company has, or creates an ESOP while you are working there, you should expect to pass through the following steps:

Keeping track of what’s going on during all these phases, following the vested options and exercising them may be confusing for both you and your employer. Nimity solves all your worries, but you should suggest to your employer first to register the ESOP at app.nimity.com/register, and then invite you to open an account with us.

 

4. Tell me more about Granting

All steps in your ESOP participation are visible in your Nimity account (register at www.nimity.com).

5: Explain more about Vesting

Vesting is a concept which is always found at the core of any ESOP, as it rewards employees' loyalty and sustained commitment (meaning the company rewards stable and productive employees). By tying ownership rights to your time with the company or performance milestones, vesting should encourage you to remain engaged and contribute to the company's growth.

6: How do I exercise my Options?

Exercising options is made easy by dedicated buttons in the employee ESOP dashboard or in the Admin ESOP dashboard.

7: I have some other questions

 

Profit / loss calculation example

Let's calculate your profit or loss if you buy ESOP shares in your company under different scenarios. Let’s say you buy ESOP shares worth 1,000 EUR, at a strike price of 0.85 EUR at a moment when the company value is 1 mil EUR, and the share price is 1 EUR. We consider the following situations:

  1. The company value stays the same
  2. The company value diminishes at 900.000 EUR
  3. The company value diminishes at 500.000 EUR
  4. The company value increases at 3 mil EUR.

 

Initial Information:

 

Scenario 1: Company Value Stays the Same

Scenario 2: Company Value Diminishes to 900,000 EUR

Scenario 3: Company Value Diminishes to 500,000 EUR

 

Scenario 4: Company Value Increases to 3,000,000 EUR

In summary, your profit or loss from buying ESOP shares depends on the change in company value and share price. In Scenario 1, 2 and 4, you experience profits due to increases in company value or share price. However, in Scenario 3, you incur losses due to decreases in company value and thus the share price. Even if the company value decreases, as long as the company share price remains over the strike price, you win. If the share price decreases below this limit, you lose.

 

8: What could Nimity do for me?

Remember: you could access all these features and more by opening an employee account at nimity.com.

9: What do some key terms mean

 

At the end

We hope this guide has allowed you to gain a solid understanding of ESOPs in general, and hopefully the ones implemented in your company. Now you're better prepared to navigate your journey as an employee shareholder and make informed decisions about all the steps you need to do as part of your company’s ESOP. Please check our platform (www.nimity.com) and web based resources if you want to know more, and do not hesitate to contact us for specific issues related to Nimity.

 

 

 

 

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