What Is ESOP Valuation And Why It Is Required?
November 15, 2019
Today Most of the founders and their employees do not understand the common issues when it comes to stock-based remuneration. The founders need to first understand this well before they can structure offers with a significant stock component .valuations are central to the employee stock ownership plan process.
It is a call option which means that under an employee stock ownership plan (ESOP) the employees have no obligations and have the right to buy the shares of the company on a predestined date at a predestined price. It is a strategy that enables a company to awards the existing & new employees with stock options based on their performance. ESOP Valuation commonly an enabler used by a company to engage, retain & enumerate its employees and get them awarded for being associated with the company while creating a sense of ownership in the mind of employees and their interest in the organization remains intact.
Why it is required?
- Motivating, retaining, and rewarding employees is the main focus of ESOP. Employees who helped make that business successful in the first place.
- It also provides an exit strategy for changing owners or founders of an organization
- To comply with applicable provisions of the Indian Income Tax Act, 1961 and notification issued by CBDT in this respect, this valuation is required to determine the value of perquisite taxable in hands of employees.
- 4Notification no. 94/2009 dated 18.12.2009 issued by CBDT, wherein it is provided that for the purpose of clause (vi) of sub-section (2) of section 17, the fair market value of any specified security/sweat equity share, being an equity share in the Company not listed at any recognized stock exchange.
Thus ESOP Valuation (both for the accounting of “Compensation Expense” by a company and for perquisite Tax payable by the employees) plays a significant role in the success of an ESOP scheme.