Employee share options are a great employee benefit on top of a decent salary. Many companies, especially startups and small businesses, use them to offer attractive packages to their employees. In essence, employees might get lower salaries now in exchange for handsome compensation in the future.

In this article, we look at what they are, how they work, and their benefits. Let’s dive right in!

What are They?

Employee share options (ESOs) refer to alternative means of compensation, where a business offers the employees, contractors, or suppliers shares in the company as a mode of payment. In most cases, they are offered to executives and those employees in senior positions.

With an employee share option, employees can also have an opportunity to purchase shares in the company at a set price within a certain period of time. In such an option plan, they tend to have a validity period. They become worthless once that period has expired. As such, employees provide an employee share option agreement that stipulates the terms of the option.

The holder of the shares decides whether to sell the shares in the open market or hold on to them as they continue growing.

Employee share options are mostly associated with startups. They mostly use them as a means to reward their employees when the company grows and goes public. They are used to motivate the employees to work hard to grow the value of the shares. Companies can also use ESOs to retain their top talent.

How Do They Work?

Let’s use an example to understand ESOs better. Let’s say your employer offers you an option to buy 1,000 shares of the company at $10 per share. You won’t be able to exercise your shares until they’re vested. In short, you don’t own the shares until the vesting period requirements are met.

The options only have value when they increase in price. For example, they may be worth $20 per share in the next five years. Then, you can decide to sell them off or retain them in your portfolio.

There are primarily three methods you can use to exercise your stock options. They are:

Cash: This is where you send money equal to your share’s worth to the brokerage firm in charge of the transaction. You receive your shares in exchange.
Cashless Exercise: This is the option where you exercise your shares and sell them for a figure enough to cover the total price. The brokerage carries out this transaction at the same time. This means that you’re left with shares you can keep or also sell.
Stock Swap: This is where you send a certificate for the number of shares widget at the current market price to exchange a number of shares at the current market price.

You notice that you can sell your shares at a profit. This is why ESOs are regarded as an attractive way of compensation. The entire transaction is also seamless, and you can entirely complete it by yourself.

What are the Benefits?

There are many benefits of employee share options to both the employer and the employee. In today’s competitive world, employers can stand out and attract top talent by offering ESOs. If you fail to give remarkable employees a reason to join your company, they’ll join your competitor. Further, they’ll stay longer in your company because they’ll have a sense of ownership—they’ll want to stay longer and enjoy the fruits of their labor.

Here are a few other benefits of ESOs:

Boost Employee Performance: When employees are offered share options, they are motivated to work even harder and enjoy the fruits of their sweat. It can also eliminate any sort of disagreement between the employees and management because they understand that their income is directly proportional to the amount of work they put in.
Gives Small Businesses Better Options: Small businesses often have a hard time attracting and retaining talented employees. They often lose their employees to larger competitors because they run on limited resources. This makes the playground tougher for startups. However, with ESOs, startups can make their compensation attractive. In addition, they can increase their capital when employees purchase their shares.
Better Brand Image: As already mentioned, ESOs give employees a sense of ownership in your business. As such, they form great relationships amongst themselves and with customers. Employees realize that they’re ambassadors of the brand. They handle all internal and external relationships as if their entire lives depended on them.

ESOs essentially give your employees more responsibility in your company. That’s why ESOs benefit both the employer and the employees.

Bottom Line

Employee share options are used to make employee packages attractive. They give the employees a right to buy the company’s shares at a particular price within a set period of time. Employees can decide to keep them or sell them once their prices rise. They benefit both the employer and employees.