An Employee Stock Option Plan, or ESOP, is your formal framework for granting stock options. Each option gives the holder the right to purchase a share at a set strike price. It is a right, not an obligation. If company value rises above that price, the employee exercises and profits. If it does not, the options simply expire worthless.
How an ESOP Works
- Grant: You allocate options from a pool, typically 10 to 20 percent of company shares. The strike price usually equals current fair market value
- Vesting: Options unlock over time. The standard is four years, with nothing vesting before year one completes
- Exercise: The employee pays the strike price and converts vested options into actual shares
- Sale: Shares get sold at an exit, IPO, or secondary sale, realizing the gain
ESOP Considerations for International Teams
Options granted abroad face different tax points. Some countries tax at exercise. Others tax at sale, and a few tax at vesting. Terminology differs too. In the US, ESOP often means a retirement style Employee Stock Ownership Plan. In Europe, India, and most startup contexts it means an option plan as described here. Note the contrast with Restricted Stock Units, which deliver shares without any strike price. Hiring through an Employer of Record? You grant options directly to the worker. Just confirm the EOR can administer any local withholding at exercise.