Eli5: What is an ESOP? And what exactly does “vesting” mean? What are the benefits AND consequences to employees with an ESOP benefit?
The company I’m at is introducing ESOP and it’s caused a whirlwind of opinions from coworkers. I tried to google it, but stocks and vesting are the one thing I could never grasp.
Thank you ☺️
In: 7
It’s basically a contract between you and your employer where they agree to give you equity in return for some conditions you need to meet. The conditions might be that you need to stay at the company for a certain amount of time, or sacrifice some % of your salary, or something else (maybe a combination of both). The equity may be referred to as “restricted stock units” (RSUs), or ESOPs, or something else. The term ‘vesting’ describes when the conditions of the contract are met for the equity to actually become yours, this normally happens gradually over a period of time.
If the company is pre-IPO (not yet floated on the stock market) then even after vesting you won’t be able to sell your shares until there is an ‘exit event’, this is simply when the company is floated on the stock market or sold to new owners.
ESOP programs exist to motivate employees to stay at the company longer, and to improve their performance (since if **you** make the company do better, **your shares** will be worth more). It can also help the company reduce their salary costs if they offer part of their compensation as stocks.
Latest Answers