Difference Between Sweat Equity Shares and ESOP

Companies issue equity shares to general investors as well as to various stakeholders, including the employees of the company. The main aim of this exercise is to achieve goal congruence by aligning company objectives to that of employees’ or as a way of motivation. This can be achieved through sweat equity shares and ESOP (Employee Share Option Scheme). The key difference between sweat equity shares and ESOP is that while sweat equity shares are provided in recognition of economic benefit and know-how that employees bring to the business, ESOP scheme comes with the option to buy a certain number of shares in the company at a fixed price in the future.

CONTENTS
1. Overview and Key Difference
2. What is Sweat Equity Shares
3. What is ESOP
4. Side by Side Comparison – Sweat Equity Shares vs ESOP
5. Summary

What are Sweat Equity Shares?

Sweat equity shares are shares issued for employees and directors at a discount or for consideration other than cash, in recognition of their positive contributions to the company. Positive contributions are often value additions in the form of providing know-how or making available rights in the nature of intellectual property rights. The purpose of sweat equity shares is to provide a way of motivation for the employees by recognizing their outstanding performance. Sweat equity shares are governed by the Companies Act, 2013 and are subjected to a number of conditions. Some of them are,

• The issue of sweat equity shares is done by passing a special resolution (form of agreement passed by of majority of not less than two-thirds of the votes cast by the shareholders).
• Following the issue of shares, they will be non-transferrable for a time of 3 year period.
• The price at which the sweat equity shares and the valuation of intellectual property rights or of know-how or value additions for which sweat equity shares are to be issued will be valued by a registered valuing.

What is ESOP?

ESOP (Employee Share Option Scheme) provides the existing employees the right to purchase a certain number of shares at a fixed price, sometime in the future. The main objective here is to align the company’s goals with that of the employees. Basically, since ESOP provides the option for employees to become future shareholders, they will perform for the betterment of the company, expecting that the overall performance will result in higher share prices. Like sweat equity shares, ESOP is also governed by the Companies Act, 2013. Accounting treatment and related guidelines for ESOP are explained in IFRS 2- Share Based Payments.

There are different types of ESOP as follows, with slight variations to the general criteria.

What is the difference between Sweat Equity Shares and ESOP?

Summary – Sweat Equity Shares vs ESOP

Although there is a difference between Sweat Equity Shares and ESOP, both of them are two types of acts that a company can carry out to communicate that employees are valued and recognized. These type of schemes assist companies to retain valuable employees for a long period of time and benefit from their efforts to improve company’s performance.  Both Sweat Equity Shares and ESOP cannot be conducted through a preferential share allotment (the issue of shares or other securities by a company to any select person or group of persons on a preferential basis) since these shares cannot be issued to general shareholders.

Reference:
1. “Difference between Sweat Equity shares and Employee Stock Option Plans.” Finance Nectar. N.p., 05 June 2013. Web. 07 Feb. 2017.
2. “Employee Stock Option – ESO.” Investopedia. N.p., 14 Sept. 2015. Web. 07 Feb. 2017.
3. “Sweat Equity vs ESOP.” EsopOnline.in. N.p., n.d. Web. 07 Feb. 2017.