The choice between sweat equity shares vs ESOP often needs to be clarified. A company's shares are typically listed on stock exchanges after a public offering. But corporations can offer shares to their employees using an ESOP or sweat equity shares.
This incentivises the employees and encourages them to contribute to the company's development since doing so would also benefit their shareholdings.
Before understanding the difference between the two concepts, let us know about them.
Sweat Equity shares are issued in exchange for employee contributions to know-how, intellectual property, or other value additions. A company may give these shares at a discount or in exchange for something other than currency.
In this case, the know-how or intellectual property rights may be equivalent to the consideration. The essential component here is a non-monetary consideration. They are a form of compensation for the employee's hard work and contributions to the company.
When a corporation provides its employees with ESOP (Employee Stock Option Plan), it agrees to share its profits. In a sense, ESOP holders are co-owners of the corporation.
In an ESOP, certain employees are given the option to buy shares of a company in the future at a price already set. Most of the time, this price is reduced to encourage employees to participate in equity. The ESOPs can only be given out in exchange for cash.
Now let us move to the difference between ESOP and sweat equity.
We hope the discussion of ESOP vs equity on key points has clarified things for you. ESOP and Sweat Equity Shares can be important ways to get the best employees. The Company will decide how to use these tools in the best way.
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Compared to other types of employee benefit programmes and regular basic compensation, ESOPs stand out for several reasons. An ESOP is the company's alluring attempt to combine your retirement funds and salary into one convenient package. These are constantly vulnerable to market fluctuations; all is lost if the company underperforms.
The ESOP is classified as a perquisite under the income category 'Salary'. So, when an employee uses his option, the difference between the Fair Market Value (FMV) and the exercise price is taxed as a perk.