you know the difference between an ESOP, an RSU, and an ESPP? Learn the differences and decide what works best for you and your money.

In recent years, there has been a surge in enterprises, particularly start-ups, offering employees the option of stock involvement. It’s a fantastic method to reward staff and keep them on board. ESOP, RSU, and ESPP are some of the most popular firm stock programs. Employers are utilising the full range of options available to them, given how tough it has become to hire and retain talent, particularly technology.

Let’s have a look at how these choices serve:

• RSU

Restricted Stock Units (RSUs) are a type of limited stock. In this case, the employer provides its employees with shares without any conditions but with a vesting term. This strategy is frequently used by companies whose stock is already traded on a stock market. Employees who have earned RSUs frequently inquire about how the vesting period works.

After a 5-year vesting term, a company may allocate 10,000 shares. You will receive 10,000 shares once the vesting period has ended. You will lose out if you leave the company sooner, and employees with RSUs are more likely to stay with the company longer.

Employees should be aware that RSUs might be distributed in stages, such as 2,000 shares in the first year, 2,000 more in the second year, etc. On the other hand, most employers award this over time and typically in increasing sums as the years’ pass. Employees frequently receive these shares at a low cost. They’re an excellent way for businesses to keep high-potential resources in reserve.

• ESOP

The Employee Stock Option Plan (ESOP) is probably the most well-known form of stock distribution among start-ups. In this situation, the employee is given the ‘option’ to purchase business shares at a predetermined price later. For example, if someone starts working at a company on April 1, 2021, she may be given the option to buy 100 stocks at a predetermined exercise price of Rs 50 after a year. The vesting time is one year in this situation.

She can only buy 100 shares of the company for Rs 50 once the vesting period is completed. This would be regardless of the market price at the time. The options would have expired if she had left before the end of the year. Employees are frequently given a “vesting period” schedule, which details how many options will be vested. This is a terrific tool for the organisation to connect your incentives with the company’s long-term goals.

If the stock isn’t publicly traded, as is commonly the case, the employer regularly offers an exit strategy by buying back shares from employees at fair market value (FMV). This was recently demonstrated in the cases of several significant private enterprises, including Flipkart and Swiggy. ESOPs are distributed in vested blocks over time, and the four-year vesting period is the most prevalent. Over four years, a good vesting schedule is 25% vesting every year. For example, if 1000 shares are granted with a 25 per cent annual vesting schedule, the employee will receive 250 shares each year for the next four years.

Employees with ESOPs have an exercise period, which is a certain amount of time during which they can purchase shares at the agreed-upon price. Good firms have an extended exercise period, lasting up to ten years or more following the vesting date.

• ESPP

This is another method most publicly traded companies use to reward or remunerate their staff. Employees who partake in the Employee Share Purchase Plan, or ESPP, can purchase equities at a reduced price. The most regular markdown is between 10% and 20%. So, if a stock is selling at 100 INR, an ESPP participant might acquire the stock for 80 INR if the applicable ESPP discount is 20%.

Employees are typically given a monthly purchasing window, with the total purchase amount being related to their compensation (usually 10-15 per cent). It’s nearly like investing in your company’s stock through a systematic investment plan (SIP). Supposing you earn Rs 20 lakh a year and aim to donate 10 per cent of your earnings every month towards buying equities. You will be able to buy Rs 2 lakh worth of shares at a discounted price at the end of the year.

Conclusion

It’s critical to comprehend your equity plan and the terms associated with vesting. Also, once you’ve decided whether or not to exercise your stock plan or leave the firm, you should research the tax ramifications. Although company equity choices can be scary, the best course of action is not to be afraid to ask for guidance from your company’s managers.