Valuation of ESOPs & Sweat Equity
Startup companies, in their infant stages, face uncertainty given the macro cum micro operating environment, availability of continuous stream of funds, ability to make a mark with technological innovations and retain manpower. Employee retention and sustaining their motivation levels has been one of the key concerns for the employers of startup firms.
In this regard they always come up with one or the other new innovative and attractive compensation packages structured to target highly skilled niche workforce. Employee stock options (ESOP) and sweat equity are one of the favorite methods of attracting and motivating talent given the companies are illiquid to pay high salaries and need to utilize the freshly infused funds for growing their business.
ESOP is provided with an aim of empowering employees to partner with the financial outcomes of the firm. Sweat equity, on the other hand, refers to the intangible benefits accrued through non-financial means in the form of employee know-how and niche skills. In certain cases, employers also consider awarding phantom stock options wherein the employees are not exercised to have a direct share of the actual stocks but instead provisioned with synthetic stocks that directly correlate to the financial outcome and wellbeing of the startup firm.
- Sweat Equity
Shares mean equity shares issued by the company to its directors and / oremployees at a discount or for consideration other than cash for providing know how or making available the rights intellectual property rights or value additions. In other words, it refers to equity shares given to the company's employees on favorable terms, in recognition of their work. The issue of sweat equity allows the company to retain the employees by rewarding them for their services. Sweat equity rewards the beneficiaries by giving them incentives in lieu of their contribution towards the development of the company. Further, it enables greater employee stake and interest in the growth of an organization as it encourages the employees to contribute more towards the company in which they feel they have a stake.
Sweat equity are good plans through corporate rewards stock options to the employees, subject to good execution. In India, from a legal point of view, ESOP valuation is considered for accounting and taxation purposes. Corporates book compensation expense for issuing ESOPs over vesting period based on merchant banker valuation and at the time of exercise, valuations required for calculation of perquisite tax payable by employees.
