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ESOP Vs Sweat Equity Shares

Sweat Equity Shares is commonly known as equity shares issued by a company to its employees or directors at a discount or for consideration other than cash. In other term, it refers to the allotment of equity shares to employees as compensation for the efforts & hard work they provided in the growth and success of the company. The issuing of “sweat equity” can help the company to attract and hold its employees by rewarding them for their contribution. SE Shares are issued as consideration for transfer of IPRs to the company or as other value addition these are issued to the employees, Officers & Directors of the Company.

Start-ups generally use ESOPs which is also known as Employee Stock Option Plan rather than Sweat Equity to attract, hold and reward their employees.  In the case of ESOPs, employees need not be allotted actual shares of the company till the time of exercise or a liquidity event; but, in the case of Sweat Equity, the shares are allotted to the employee immediately. Employees Stock Ownership Plan (ESOP) are given as Incentive and retention plan, and these are issued to employees & officers. These options are issued with conversion right at a predetermined cost and the issue price can be less than the intrinsic value of the shares.

Employee Stock Option(ESOP) has prescribed Companies Act, 2013- Section 2- Sub-section (37), according to this act “employees stock option” means the option given to the directors, officers or employees of a company the benefit or right to purchase/ subscribe for, the shares of the company at a future date at a predefined cost.

Let us discuss what are the factors which create difference between Sweat Equity Shares & ESOPs: –

BasisSweat Equity Share
Issued for WhomIn the case of Sweat equity shares, it is issued to all kinds of employees who are associated with the company.
Holding PeriodIt is calculated from the date of allotment or transfer of such equity shares
Norms for IssueIn case of SWEAT Equity-Company can issue Sweat Equity shares only after remaining in business for 1 year
Restrictions on Issue*Sweat Equity Shares cannot be issued for more than 15% of the paid-up equity share capital in a year or shares of the value of 5 crores; whichever is higher
Guidelines for PricingPricing guidelines are defined for Sweat Equity shares which is required defined by a registered value.
BasisEmployees Stock Option (ESOP)
Issued for WhomIn the case of ESOPs, it is issued to all class of employees except the promoters or anyone belonging to the promoter group
Holding PeriodIt is considered from the date of exercise of the options
Norms for IssueNo such norm, company can grant ESOP at any point of time after incorporation
Restrictions on Issue*Company has no such restrictions in issuance or grant of ESOPs
Guidelines for PricingThere is no pricing guideline defined for issuance or grant of ESOPs

*In case of a start-up company, the issued sweat equity share should not increase more than 50% of its paid-up capital up to the period of 10 years from the date of its incorporation or registration.