ESOP provides a company's workforce with an ownership interest in the company. In an ESOP, companies provide their employees with stock ownership, often at no up-front cost to the employees. . Shares are allocated to employees and may be held in an ESOP trust until the employee retires or leaves the company. The shares are then sold

Ask whether the shareholders and the board have approved the scheme. ESOPs are decided by the company compensation committee.

For unlisted companies, the problem is lack of liquidity and clarity on valuation. That is why companies must mention all exit options clearly at the time of grant. For instance, if the initial public offer is the only exit route, it must be stated clearly and the potential uncertainties related to listing brought to the employee’s attention.

Under this scheme, an alternative is given to the employee to acquire shares of the company. These shares are known as stock options and are granted by the employer based on the performance of the employee. Companies offer shares as an employee benefit and as a deferred compensation.

If an unlisted company proposes to issue sweat equity shares (shares under ESOP or such Plans) for consideration other than cash, it shall comply with following legal requirements:

(a) The valuation of the intellectual property or of the know-how provided or other value

addition to consideration at which sweat equity capital is issued, shall be carried out by a

valuer.

(b) The valuer shall consult such experts, as he may deem fit, having regard to the nature of the

industry and the nature of the property or the value addition.

(c) The valuer shall submit a valuation report to the company giving justification for the valuation;

(d) The company shall give justification for issue of sweat equity shares for consideration other

than cash, which shall form part of the notice sent for the general meeting.

(e) Company would need to get an equity share valuation exercise done by an independent valuer. The Fair Market Value as per that valuation report can be considered for the purpose of granting stock options.

Sebi has specific guidelines for employee stock options and employee stock purchase plans and the company would be bound by them.