Difference between Sweat Equity shares and Employee Stock Option Plans

Before proceeding to the difference between Sweat Equity shares and Employee Stock Option Plans,  let us have a look at the meaning of these terms:

Employee Stock Option Plans (ESOPs):

Employee Stock Option Plan (ESOP) is governed under the SEBI guidelines, 1999. ESOP plan refers to the plan where company’s employees  can get an opportunity for buying their company shares at a predetermined  price in future. Company’s offer their shares as a compensation to their employees.

SEBI diversifies the ESOP plan into three broad schemes, first one is Employee stock option scheme (ESOS), second is Employee stock purchase scheme (ESPS) and third is Phantom shares / Share application rights (SAS).

In general, companies offer these plans in two cases. Company offer their shares when it does not have sufficient amount for their employees and in such a case they offer their shares instead of cash. On the other hand, companies offer their shares as a compensation for their employees. However, this compensation is in a form of non cash compensation. This compensation is given for getting a high level individual performance from their employees, therefore, company offer their shares as a reward for their employee’s performance. Companies can create a good wealth through their ESOP plans.


Sweat Equity Shares:

It is also same as the ESOP plan, wherein companies are issued their equity shares at a discount and as a consideration, other than cash  to directors and employees of the company. In India, the concept of the Sweat Equity shares are started by Infosys, where the company was issuing their shares to their employees for their efforts and work they put in. This can be treated as a reward for employee’s performance. These shares are issued at a discounted rate of the market price. The main objective of the company is to issue these shares for making the employees feel that they are an integral part of their company.

Well, after discussing about the brief meaning of these both terms, we define major differences between both of them. Let us take a look:

1. Employee stock option plan (ESOP) has been issued to the companies employees for purchasing it at a determined price, which have a low price as compared to the market price. However, in the case of Sweat Equity shares, they are issued at a discount or without monetary consideration to company employees.

2. Sweat Equity Shares can be issued to the promoters of company but, on the other hand, ESOPs cannot be issued to any promoter or promoters group.

3. The lock in period of Sweat Equity Shares is minimum 3 years but in the case of ESOPs, there is no lock in period. The category of ESOPs plan, which is known as Employee Stock Purchase Scheme (ESPS), has a lock in period, which is only 1 year.

Hope you like this article about the difference between Sweat Equity shares and Employee Stock Option Plans. For more details read related articles.

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