Are ESOPs free?

Are ESOPs free?

Yes and No.

The full form of ESOP is Employee Stock Options. Stock options are free and the options themselves are granted to the employees free of cost. They are considered as a part of an employee’s remuneration. It is a benefit given to the employee. There is no grant price to be paid for grant of ESOPs.

However, the definition of stock options is limited to only an option to purchase shares in the company in the future. An ESOP does not automatically convert into shares in the company.

This means that when the ESOPs granted to an employee vest, the employee will have to buy shares in the company. This process of purchasing shares in the company is called “exercise” of ESOPs. When an employee exercises the right to buy the shares in the company, the employee will have to pay the “exercise price” (or the purchase price) for these shares. This exercise price is typically decided upfront at the time of granting the ESOPs and stated in the ESOP policy, ESOP Agreement or the Grant Letter.

Therefore, technically, Employee Stock Options, as widely understood, are not free.

 

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