Understanding ESOPs: Key Terms
Updated: Jul 27, 2022
These are some of ESOP key terms that you should be aware of:
Cliff Period = The minimum period of time that must elapse before an employee equity begins to accrue. This period generally lasts for one year and is designed to keep new employees with the company. Typically, if an employee leaves before the end of the cliff period, the option granted to the employee will be forfeited.
Eligible Employee = A person who is selected by the company to receive shares (units in trust setup) or options as part of an ESOP and who fulfils all the conditions as set by the company.
ESOP Pool = The portion of a company’s equity which has been ‘set aside’ for use in the ESOP.
Exercise = The act of an eligible employee making an application to have their options or units vested in them upon payment of the exercise price.
Exercise Period = The period in which an eligible employee is able to exercise their equity.
Exercise Price = The price which is paid by the eligible employee at the time of exercise of their option. This price is typically determined at the time of grant and remains constant over the term of the option.
Grant Date = The date at which the company issues its options or units to the eligible employees.
Option = This gives the eligible employee a right to purchase shares or units of a company at a later date as prescribed by the relevant ESOP.
Performance-based Condition = A requirement, which is tied to the achievement of particular goals as set by the company and must be fulfilled before an option or unit vests on an employee.
Selling Price = The monetary amount that an employee receives when they sell their shares.
Share = Represents a portion of ownership in a company.
Vesting Period = The period in which the employee must wait until they are capable of fully exercising their options. This period typically lasts for four years.
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Contributed by Ella Hall for OM Tech