What is an ESOP

1.    What is an ESOP, in Simple Terms?

An ESOP, or Employee Stock Ownership Plan, is a way for a company to give you a stake in its success. It gives you ownership within the company in the form of shares, that is of part of your overall compensation.

In practice, you don’t usually receive all the shares at once, but instead the company may grant you a portion over time depending on how long you stay or how the company performs. These shares often come with terms like vesting periods or exercise rights, but we’ll talk about it in later articles.

At its core, an ESOP is a tool to align employees and company growth. The idea is that when the company grows, its employees should reap the benefits too, giving you more than just a salary and a chance to participate in long-term value creation.

2.    Why Companies Offer ESOPs

Why would a company even offer its employees shares? Doesn't that reduce the value for existing shareholders?

Well, companies use ESOPs to attract and retain talent, especially in fast-growing startups where they might not have as much capital. Giving employees a stake in the business can:

• Improve loyalty and reduce turnover
• Motivate long-term thinking and performance
• Strengthen the sense of shared ownership and accountability

In some countries, ESOPs also come with tax incentives or regulatory benefits — which can make them a smart strategy for both employers and employees.

3.    ESOP in Asia vs the United States

The term “ESOP” can mean different things depending on where you are:

• In the United States: an ESOP is a formal retirement plan, governed by US law. Shares are held in a trust and allocated to employees over time. These plans are common in mature companies and are designed to help employees build long-term retirement wealth.
• In Asia: especially in startups across India and Southeast Asia, “ESOP” is often used more broadly to refer to any kind of employee stock plan — including stock options or RSUs (Restricted Stock Units), even if those terms mean different things legally.

As an employee, it’s important to understand how your own equity plan works, rather than assume all ESOPs are the same.