This is an second post in the series of ESOP. Read the first one here – https://financegrail.com/what-is-esop-employee-stock-ownership/

When we hear the words like Grant, Vesting, Exercise, Cliff etc… Head goes for a spin and we just ask one question – when I will get the shares ?

But you may face multiple type of situations – when you change Job, when you get lesser shares than you initially thought you will get, when you have to pay huge tax when you get the shares etc….

So, it is important that you just understand the basic and know when you will be eligible for what numbers of shares, and broadly what all these terms mean.

But in simple English, like in all my posts.

So the story starts when you join the company, if the company is employee friendly and want employees to be true part of the company then you will be offered an ESOP which will be governed by the ESOP Policy.

So, lets understand, if you choose to accept the ESOP then how and when you will get the shares and what all these terminologies mean –

Grant of shares – It is a simple act of the company to offer you shares in the company and your acceptable of the offer.

At the time of the grant of shares, you will be provided ESOP policy which will tell you what will be Vesting schedule and what will be the exercise price.

Cliff Period – It is the minimum number of years you will have to be employed in the company to get any shares.

Vesting period – It is period which has to pass after which you will be eligible to get the shares. It can be one time for bunch of share and/or continuous for some shares after certain period.

Lets take a example to make it very clear –

Imagine you joined a company and you are offered (granted) 100 ESOPs on 1st Jan 2020, there is cliff of 2 years and vesting of 25% shares every year. Exercise price is 10 per share.

So, what does it means for you –

On 1st Jan 2021, you have completed 1 year so 25% shares have vested but you have not completed Cliff of 2 years, so if you leave today then you will not get any shares. (Vesting 1)

On 1st Jan 2022, you have completed 2 year so 50% shares have vested and you have completed Cliff of 2 years, so if you leave today you will get 50 shares for 500 rupees (i.e. 50 shares @ 10 per share). (Vesting 2)

On 1st Jan 2023, you have completed 3 year so 75% shares have vested and you have completed Cliff of 2 years, so if you leave today you will get 75 shares for 750 rupees (i.e. 75 shares @ 10 per share) (Vesting 3)

On 1st Jan 2024, you have completed 4 year so 100% shares have vested and you have completed Cliff of 2 years, so if you leave today you will get 100 shares for 1000 rupees (i.e. 100 shares @ 10 per share) (Vesting – Final)

As an when shares are vested and cliff period is passed, you are eligible to get shares registered on your name. The act of getting the shares registered on your name is called Exercise of shares.

Timing of exercise of shares, is a topic in it self and it is very important to know, how much time you have from vesting to exercise because it may lead to a situation that just by getting shares registered in your name, you may have to pay huge tax bill, which obviously you may not want to pay because you would have not got any cash in hand from these shares and do not even know whether we will get it in future or not (especially when you have shares of start-up!)

Lets look at Exercise period, impact and taxable in next post. Read – https://financegrail.com/esop-exercise-of-shares-and-cash-impact/

Also, How to exit from ESOPs ? – https://financegrail.com/sale-options-for-esops-cash-and-wealth/