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
ESOP means you can buy ‘shares’ in the company which means you are essentially a co-owner. At a minimum it typically means you’ll get a ‘dividend’ which is a small payment per share based on profit each year, and a vote in certain company decisions.
Your shares are typically only transferrable directly between you and the company. You cannot sell your shares to your parents, not can someone offer to buy them from you. This means the *value* of the stock, rather than being super tied to supply/demand is more like “what the company says it is”, which is a sort of big risk. I’d look into how these is done with your company, my company has a 3rd party do it for example.
Finally, you’ll probably hear about things called “RSU”s and get confused on an RSU vs a Stock share.
A stock is a thing you own and it can’t be taken from you. Since this is a private company if you ever stop working for them (quit, fired, laid off, etc) they will force a sale of the stock back and you’ll get paid. You can’t ‘not get paid’ the going value of the stock.
An RSU is a ‘promise’ of stock and it needs to ‘vest’ before it becomes stock, 3 years is the typical vesting cycle. So the company gives you 1 RSU today, nothing happens for 3 years on then on that future date 1 share of stock appears in your account. Three important notes
* Your RSU is a promise of *shares* not value. Let’s say the company stock is worth $1 and you get 10 RSUs, that’s $10 worth of stock right? If tomorrow the stock gets revised to $2 per share, you still have 10 RSUs, which is now worth $20! This means RSUs can be worth a lot more when they vest then you thought. If the stock shoots up to $100 per share your 10 shares become $1,000 when they vest. (or the opposite happens…)
* RSUs typically get dividends (annual payments to you) in the form of more stock, not cash. So if you have 10 shares and the dividend is $1 per share, you’ll get $10 worth of more stock. Again after 3 years this can mean your 10 share RSU can become a bunch more.
* If the company gives you $5, that’s taxable and you need to pay taxes. If they give 1 share of stock, *that’s* taxable and you pay taxes. RSUs, as a promise *are not* taxable. The moment they turn into stock though, is a taxable event, the same as if the company gave you a bonus that day. You should how your company will treat this. My company auto-sells enough of your RSUs/Stock to cover the tax bill and pays it for you.
Did that make any sense? My company went employee owned a decade ago and I’m fairly knowledgeable about it, DM if you have anything else.
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