Types of Stock Option Plans: Comparing ESOPs, RSUs, and SARs | Hissa

Understanding Stock Options: Essential Insights and Key Considerations | Hissa

Implementing stock option plans effectively requires a clear understanding of the various options available. In India, companies typically choose from Standard ESOPs, ESOPs Exercised Only at Liquidity Events, Trust-Based Stock Option Plans, Phantom Stock Units or SARs, and Restricted Stock Units (RSUs). Each plan has its unique features, benefits, and administrative requirements. This guide provides a detailed comparison to help you determine which stock option plan best suits your company’s needs and your employees’ interests.

Comparative Analysis of Stock Option Plans

AspectStandard Stock Option Plan (ESOP)ESOP Exercised Only at Liquidity EventStock Option Plan under Trust StructurePhantom Stock Units or SARsRestricted Stock Units (RSUs)
StructureEmployees can purchase company shares at a fixed discounted price in the future, rewarding them with ownership at a lower cost.Similar to the standard plan, but options are exercisable only during a predefined liquidity event like an IPO or acquisition.A private trust administers stock options, holding legal ownership of shares while granting beneficial ownership to employees upon exercise.Employees receive cash equivalent to the appreciation in share value without actually owning shares, paid at a liquidity event or as specified in the SARs plan.Employees receive shares upon vesting without any purchase required. The shares are given based on the vesting schedule.
EligibilityEmployees and directors are eligible. Promoters cannot participate.Employees and directors are eligible. Promoters cannot participate.Employees and directors are eligible. Promoters cannot participate.No restrictions. SARs can also be granted to consultants and advisors.Employees and directors are eligible. Promoters typically cannot participate.
Vesting ConditionsVesting conditions are specified in the plan, typically including time, performance, or exit parameters, with a minimum 1-year cliff and 4-year vesting period.Same as a standard ESOP.Same as a standard ESOP.Same as a standard ESOP.RSUs vest according to a predetermined schedule, which could be time-based, performance-based, or a combination of both.
Exercise and Exercise PeriodVested options must be exercised within a defined period; otherwise, they lapse.Vested options can only be exercised during a liquidity event such as a merger, acquisition, IPO, or buyback.Similar to a standard ESOP.No actual exercise; instead, the appreciated value is paid out during a liquidity event or as specified in the SARs plan.No exercise required. Shares are delivered automatically upon vesting.
Shareholder RightsShareholder rights are granted only after options are exercised.Shareholder rights are granted only after options are exercised.Shareholder rights are granted on exercise, as the beneficial ownership of shares is transferred to employees.No shareholder rights as SARs do not involve actual shares.Shareholder rights are granted once shares are delivered upon vesting, including voting rights and dividends.
Exit IssuesThe company must manage the sale of shares during an acquisition, which can be complex.Lower risk as exercise happens only at a liquidity event, though employees might remain on the cap table post-exercise.Involves complex administration and potential issues if the trust holds excess shares.The company must fund the cash payouts for SARs, similar to managing stock buybacks or option cancellations.Generally straightforward as shares are automatically delivered upon vesting, reducing complexity during exit events.
AdministrationComplex, involving issuing share certificates, updating the Register of Shareholders, and potentially buying back shares.Simplified administration as exercise only happens during a liquidity event.Complex administration involving trust management, audits, and filings.Least cumbersome, focusing on calculating and paying the appreciated value of shares.Administration is relatively simple as shares are issued automatically upon vesting without the need for additional transactions.
Termination of EmploymentOptions depend on the nature of employment separation; vested options can be exercised, unvested options lapse.Options lapse if the employee leaves before a liquidity event.Termination is simpler as no actual shares are involved.No exercise means no impact on termination; employees do not hold actual shares.Unvested RSUs typically lapse upon termination of employment, while vested RSUs are delivered even if the employee leaves.
Income Tax (Exercise)Taxed as perquisite under 'income from salary'; tax is deducted at source on the value of options exercised.Taxed as perquisite under 'income from salary' at the time of exercise during a liquidity event.Taxed as perquisite under 'income from salary' at the time of exercise.Taxed on the cash amount paid to employees, with tax deducted at source when the amount is paid.Taxed as ordinary income based on the fair market value of shares on the vesting date.
Income Tax (Sale)Capital gains tax applies based on holding period: long-term (over 2 years) or short-term (under 2 years).Similar to a standard ESOP for IPOs or acquisitions.Same as a standard ESOP for capital gains tax.No sale of shares, so no capital gains tax applicable.Capital gains tax applies based on holding period after shares are vested.

Selecting the appropriate stock option plan is essential for aligning company objectives with employee incentives. Standard ESOPs provide direct ownership with a clear purchase price. ESOPs Exercised Only at Liquidity Events simplify administration but delay benefits. Trust-Based Plans offer beneficial ownership but come with complex management. Phantom Stock Units or SARs provide cash rewards without actual equity. Restricted Stock Units (RSUs) offer straightforward share distribution upon vesting, with fewer administrative hurdles. By understanding these options, you can choose the plan that best fits your organizational goals and supports your employees effectively.

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