What is an ESOP?
Updated: Jul 27, 2022
An ESOP is an employee benefit plan that gives employees ownership interests in your company, so essentially your employees receive financial benefits when your company performs well. This equity plan is a crucial way in which to retain talent and foster a culture of productivity, ownership and innovation.
There are two key concepts to an ESOP agreement; vesting period and cliff period. A vesting period dictates how long an employee must wait until they are capable of fully exercising their options and this typically lasts for four years. A cliff period is the amount of time that an employee needs to stay in the company before they can start accruing equity.
A company typically sets aside a proportion of its equity for the purpose of the EOInSOP and this is known as the ESOP pool. Choosing the size of the ESOP pool is a crucial decision for any company wanting to implement an ESOP.
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Contributed by Ella Hall for OM Tech