VALUATION OF FINANCIAL INSTRUMENT
An Employee Share Option Plan (ESOP) is a scheme that allows employees to buy shares in their company at a favourable price. It is a way for the company to offer incentives to its employees, and reward their performance.
An ESOP grants employees the right to buy these shares at a predetermined price and on a predetermined date; but it does not oblige them to do so. However, there are a number of differences between ESOPs and ordinary share options and warrants. These include early exercisable behaviour, an exit rate, exercisable terms (ie a net income target) and possible timing restrictions on the exercise of options and the sale of shares. These are discussed in this article.
An ESOP valuation is required to determine employee compensation costs at the time when options were granted to employees. The compensation costs are apportioned over the vesting period of the ESOP. A summary of the key methods applied in ESOP valuations are provided below.
The full BDO article can be downloaded below.