
Issue of Employee Stock Option Plan (ESOP)

Lifecycle
Often entrepreneurs dilute their holdings by issuing ESOP in order to achieve 2 goals–
a) retain employees b) zero cash cost.
Called as Issue of Sweat Equity Shares, its Valuation is compulsory by registered valuer under Rule 8 of Companies (Share Capital and Debentures) Rules, 2014. Key employees are retained with ESOP (equity or cash settled) and valuation can be achieved through Binomial and Black & Scholes Modelling. Typically, a normal distribution is used to estimate pricing where key inputs include volatility, maturity, strike price, and interest rates. Typical challenges arise when such options are American (can be exercised anytime in exercise period) and dependent upon market-based vesting conditions such as the market price of equity share of Pvt. Ltd. Company.
ESOP Scheme
- Drafting & Identification of Incentive Plan
- Assessment of Award
- 409A Valuations to decide Exercise Price
- Performance based vesting tranches
- Substantial exercise period
- Articulation of Exit Strategy
- Non-transferability of Option
- Identifying Tax Obligations of Employer and Employee
ESOP Types
- Equity Settled Options
- Cash Settled Options
- Drag along rights to investor
- Rule 8 of Companies (Share Capital and Debentures) Rules, 2014
- Tranches Spread Over 36-48 Months
Have more questions?
$/€ Option - American or European
Separating Market specific and Non-market based vesting conditions
Valuation Complexities
Identifying Volatility in Share price
Unlisted shares
Valuation Complexities
High growth potential
No revenues and operating losses
Uncertain call future potential
Primary asset = IP
Expected ESOP
Negative bottom line
Private entity (non-comparable listed entities)
How can we help you?

Combined usage of Binomial Model and Black & Scholes Model

Monte Carlo Simulation for Highly Complex options

Expertise in ASC718, IFRS 2, and Ind AS 102

Mixing relative and intrinsic valuation methods

Estimating volatility and sensitivity
How can we help you?

Combined usage of Binomial Model and Black & Scholes Model

Expertise in ASC718, IFRS 2, and Ind AS 102

Estimating volatility and sensitivity

Monte Carlo Simulation for Highly Complex options
