ESOPS As A Funding Tool For Startups

Hridya Sharma, Maharashtra National Law University Mumbai

I. Introduction

Finding, inspiring and retaining exceptional people is one of the largest potential challenges for startup founders. By encouraging employees to own stock in the company they work for and providing them with an incentive to stay with that company while also engaging more in its ongoing operations and future plans, granting of ESOPs could tackle the issue.

II. What are ESOPs?

ESOP is a type of employee benefit plan which is intended to encourage employees to acquire stocks or ownership in the company.

Under the Employee Stock Ownership Plan, employers offer their employees the stock of the company at a low or no additional cost that they can encash after a specified period at a specific price. Until an employee leaves the company or retires, the shares for an employee stock ownership plan are retained in a trust unit for security and growth. Following their departure, the corporation buys the shares back and distributes them to more employees.