ESOP vs RSU

Overview

In recent times, ESOP and RSU are gaining popularity in India. Many start-ups often want to reward their top-performing employees for their extra efforts in making the organisation successful. But incentivizing the employees in monetary terms may not be feasible for start-ups due to their low profit-earning capacity in initial years. Hence, start-ups offer other benefits to employees which may be more valuable to them such as paid leaves, vacation days and share based payments. The share based payments may be given in many different ways. Two such popular ways are in the form of ESOP and RSU stock. In this blog, we will delve into ESOP vs RSU stock which are two methods of share based payments. 

RSU Meaning

Restricted Stock Unit Grants (RSUs) are stock grants to employees upon fulfilment of certain conditions such as upon achieving a set milestone or after completion of a certain time period or combination of both. The shares are granted to employees free of cost. Employees can also liquidate and sell these units once they receive the stocks. RSU stock may be granted in the form of equity shares or cash equivalent in value, depending on the terms of the grant agreement between the employer and the employee. RSU stocks are more convenient because no stock pricing is involved.

ESOP Meaning

ESOP is a share based payment method where the top performing employees of the organisation are granted stock options. The stock options offer the employees an option to buy the stocks at a price lower than the market/ fair price of the equity shares upon completion of the vesting period. The employees may or may not exercise their option and hence have a right and not the obligation to purchase the stock. This option is highly beneficial in long-term retention and wealth creation for employees because the start-up possesses a potential for exponential growth, hence increasing the value of the shares exponentially. Thus, ESOP shares offer significant advantages to start-ups as well as the employees. ESOP vs RSU are covered below.

There is no clear winner while considering ESOP vs RSU, but it depends on the objective and circumstance. In some circumstances, management may not be keen to give voting rights as part of shared based payment in which case RSU will be more suitable as compared to ESOP. In case management wants to save cash, they can prefer more on ESOP as compared to RSU. Therefore, choosing between ESOP vs RSU depends on the objective of the management. 

Conclusion

A company has multiple options to reward its employees but understanding which option is more economically feasible and also takes care of the employees is necessary as this may have a significant impact on the well-being of the organisation and its future success. Therefore, understanding the ESOP vs RSU is important to make an informed decision whether which of these fulfil both needs of the organisation. A start-up has to consider many factors before making any decision thus, it is advisable to seek expert advice before taking any step.