Valuation of ESOPS & Sweat Equity

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Valuation of ESOPS & Sweat Equity

We know that Start-up companies in beginning face uncertainty given the operating environment, availability of continuous stream of funds, ability to make a mark with technological innovations and retain manpower. Employee retention has been one of the key concerns for the employers of start-up firms.

Employee stock options (ESOP) and sweat equity are one of the favourite methods of attracting and motivating talent given the companies are unable to pay high salaries and need to utilize the freshly infused funds for growing their business.

Sweat equity, on the other hand, refers to the intangible benefits accrued through non-financial means in the form of employee know-how and skills.

Shares mean equity shares issued by the company to its directors and / or employees at a discount or for consideration other than cash for providing know how or making available the rights intellectual property rights or value additions. . The issue of sweat equity allows the company to retain the employees by rewarding them for their services. Further, it encourages the employees to contribute more towards the company in which they feel they have a stake.

In India, from a legal point of view, ESOP valuation is considered for accounting and taxation purposes. Corporates book compensation expense for issuing ESOPs over vesting period based on merchant banker valuation and at the time of exercise, valuations required for calculation of perquisite tax payable by employees.

We help companies select the most appropriate approach and estimate all required parameters. We deliver a well-supported valuation that fulfils IFRS 2, FASB ASC Topic 718, or other country specific financial reporting requirements.