Any organisation needs dedicated employees to flourish, and ESOP (Employee Stock Ownership Plan) is an important strategy used by employers to retain talented employees for a longer tenure in the organisation. Under this system, employees can purchase a certain number of shares of the company by exercising their stock options after the vesting period ends. Meanwhile, ESOP financing is a loan facility where employees can avail of a loan against the shares their employer has granted them through ESOPs.
What is ESOP financing?
At its most fundamental level, ESOP financing involves a lender providing liquidity to the seller(s) following the sale of a company to an Employee Stock Ownership Plan (ESOP).
A cornerstone of this process is the acquisition of company stock by the ESOP trust, thereby generating liquidity for the seller. A bank typically extends a business loan covering 20% to 40% of the company's enterprise value. If further funding is required (as is usually the case for a complete ESOP sale), the seller will typically accept a promissory note for the remaining balance. In some instances, a third-party junior or mezzanine lender might provide a smaller portion of the financing.
Benefits of ESOP financing
- Access to capital: Gain access to the necessary funds to exercise your Employee Stock Options (ESOPs) and purchase company shares.
- Wealth creation: Investing in your company's growth through ESOPs can lead to significant wealth creation in the long term.
- Flexible loan options: Avail loans ranging from Rs. 1 lakh to Rs. 175 crore with flexible repayment tenures from 7 days to 36 months.
- Competitive interest rates: Enjoy competitive interest rates starting from 8% per annum.
- High Loan-to-Value ratio: Get loans up to 50% of the ESOP share value, providing you with ample funding.
- Transparent pricing: No hidden charges; all fees and charges are clearly outlined.
- Wide corporate partnerships: Access ESOP financing options across a wide range of partnered companies.
- Easy application process: Minimal documentation is required for loan application.
- Convenient online management: Manage your loan online through the dedicated customer portal, "My Account."
- Flexible repayment options: Utilize flexible prepayment and foreclosure options with no additional charges.
It is necessary to know the key components of ESOP financing for better understanding.
Key components of an ESOP scheme
Before learning about the key components of ESOP Financing, one needs to understand the components of an ESOP scheme.
Employees must understand all essential features of ESOPs provided by their employer. Following are the key components of an ESOP scheme :
- Primary objective
The primary objective of an ESOP outlines the reasons why a company is offering its shares to its employees. For example, the primary objectives may mention whether the ESOP is a reward for meeting performance metrics or the retention of old and loyal employees. - Mode of settlement
The mode of settlement can either be cash or equity shares or at the sole discretion of each lender. - Route of implementation
An ESOP scheme mentions what would be its route of implementation, i.e., whether it would be implemented directly or through the trusts. - Coverage or selection criteria
Employers need to consider which of the employees, or the band levels should become a part of the grant of ESOPs. - Identification of the administrator
An ESOP administrator is responsible for the day-to-day administration, or management, or record keeping of the ESOP scheme. - Vesting parameters
This is an important element of an ESOP because employees must remain in their companies during the vesting period to benefit from ESOPs. Vesting parameters include minimum and maximum vesting period, vesting conditions, and vesting schedule. - Exercise parameters
This factor includes the exercise price, which an employee needs to pay, and the exercise period during which one must exercise their ESOP. - Employee
An employee is a person who works for a particular organisation. - Grant date
It is the date when an employer and an employee enter into an agreement regarding ownership of shares on a future date. - ESOP financing approval
One must check if the employer is approved by financial institutions for ESOP financing - Eligibility
Lenders usually require applicants to be full-time employees with at least 2 years of service or more. However, the eligibility criteria shall vary and shall be subject to change at a sole discretion of each lender.
There are other important elements of ESOPs like the tax treatment for ESOPs, details regarding an employee’s rights as an ESOP-holder, etc.
Eligibility criteria for ESOP Financing
- Nationality: Indian citizen
- Employment: Employed by one of our partnered corporations
- Age: Between 18 and 70 years old
To apply for ESOP financing, please have the following documents ready:
- PAN Card
- Valid Address Proof: Aadhaar Card, Passport, or Voter ID
- Photograph
- Bank Account Statement
- Signature Image on a white background
Note: Eligibility for ESOP financing is subject to the company being on our approved list and meeting the stated criteria.
Why should employers go for ESOP?
The following points illustrate why an employer may want to provide ESOPs as compensation:
- Employers can treat it as a strategy to create a ready market for their company shares. It also strengthens relationships between an employer and employees.
- Considering that stock contributions are entirely deductible, employers can issue new shares with the help of their current cash flow
- ESOP fosters a sense of proprietorship among employees. When people have a share in the profits made by a company, it motivates them to further the growth of the company.
- With an ESOP’s non-monetary incentives, companies can attract or retain talent by high-performing employees.
- Employers also achieve liquidity through ESOPs without having to sell off their assets to a third party or a competitor.
Why should employees go for ESOP?
The benefits of ESOPs for employees have been listed below:
- Employees have chances of making huge profits by selling off their ESOPs after the expiry of the vesting period
- ESOPs enable employees to take part in the growth of their company
- Most importantly, employees get the advantage of purchasing shares of their company at an affordable price
People who hold ESOPs can avail loan against shares by providing such ESOPs as security for the loan. A loan applicant may avail up to Rs. 175 crore with minimal documentation. An important benefit is that the interest ESOP financing is payable only for the loan amount utilised by the borrower. Moreover, a person will continue to receive dividends on the ESOPs even when such ESOPs are pledged in favour of the lender as security for the loan.
Several financial institutions like Bajaj Finance Limited provide pre-approved loan offers that can help applicants to avail loan instantly. One needs to enter some basic information on the official web portal of a financial institution to check his/her eligibility for such pre-approved loan offers.
To sum up, some of the key components of ESOP financing include the vesting parameters and exercise parameters, and the terms of the financing option. Employees must continue to work with the employer company who has issued ESOPs during vesting period to receive the benefits of an ESOP scheme. With ESOP financing, employees can avail funds necessary to exercise their option to purchase the shares allotted to them through ESOPs.
