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Importance of Employees Share Option (ESOP) and its Valuation

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    What is Employees Stock Option (ESOP) and ESOP Valuation

    Employees Stock Option, You should know that you need extra incentives that will draw employees with the expertise to your company if you are starting up your business in Singapore when you don’t have the funds to pay like other prominent and existing players in the market.

    The tool that startups use to achieve this is Employee Stock Option Plans, in short ESOPs. From this article, you will learn more about ESOPs, the benefits of ESOP to your startup company, things to avoid and consider as you use it.

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    What is an Employees Stock Option (ESOP) ?

    An employee stock option plan, also known as an employee stock ownership plan, gives staff the right to buy their company’s shares. A company keeps a specific from their total equity to give to their key employees or team over a period of time.

    The board of management sets the ESOP price, which is close to the standard market value of the company’s shares. To retain and motivate employees, these may be kept lower than the market price.

    Why use Employees Share Option (ESOP) ?

    There are many reasons for using Employees Stock Option. They include:

     

    1. As compensation package
      There are many benefits of ESOPs to both the company and its employees. It can serve as a compensation package. Just as earlier stated, you can use it to have the best talent you can’t pay full working for you when the company has limited cash flow. Such companies can use remuneration packages such as shares options to supplement the low cash. This is a means of bridging the gap between what their employees get in the money and the market salary.
    2. Building a company’s value
      Employees working with ESOPs work with the mindset that they are part of the people who own the business. With this, they work more effectively and efficiently, thus increasing the company’s value.
    3. Employees retention
      With ESOPs in place, employees are willing to stay with the company even though they are not paid in full or the fair market value for their expertise. They can stay till they exercise their options. Since they are now part of the shareholders, they can stay and work more for its growth.

    ESOP versus ESOW

    An ESOP is a kind of ESOW that stands for Employee Share Ownership. ESOP permits the company’s employees to purchase and own shares of the company at a certain period. ESOW, in most cases, does not add appreciation rights and phantom shares.

    Structuring ESOP

    Based on the objectives, needs, and financial health of a company, you can structure the company’s ESOP. When you want to set up your company’s ESOP, consider the following:

    • The number of stock options to grant.
    • The value of the stock’s amount you should grant.
    • Have your employees remunerated based on market standards.

    You must consider the issues mentioned earlier before deciding to have an ESOP set up.

    Final Thought

    Employees Stock Option is used to attract employees with experience and expertise to work in your company even when you are not financially capable of paying them in full. It is also a means of retaining employees and building the value of your business. However, you should consider specific issues as stated in the article before you have your company’s ESOP set up read more.

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