Issue of Employee Stock Option Plan (ESOP)
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.
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$/€ Option - American or European
Separating Market specific and Non-market based vesting conditions
Identifying Volatility in Share price