WHAT IS THE DIFFERENCE BETWEEN SWEAT EQUITY AND ESOPs? “SWEAT EQUITY” shares mean equity shares issued by a company to its employees or directors at a discount or for consideration other than cash (aka sweat) for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. “EMPLOYEE STOCK OPTION’ (ESOP) has been defined under Sub-section (37) of Section 2 of the Companies Act, 2013, according to which ESOP means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price. SIGNIFICANT DIFFERENCES between an ESOP Scheme & issue of Sweat Equity shares: • Allotment: ESOP is a grant of options to employees to purchase shares in the future at a predetermined price. Sweat equity is the direct allotment of shares at a discount or for consideration other than cash. • Timelines: A company can issue sweat equity only after one year from the date of commencing business. There is no such restriction on the issue of ESOPs • Cliff & Lock-in: For ESOPs there is a minimum period of one year between the grant and vesting of options. For Sweat Equity, there is a lock-in period of three years from the date of allotment of sweat equity shares; whereas there is no compulsory lock-in period for allotment of equity shares under the ESOP scheme. For ESOPs, the company shall have the freedom to specify the lock-in period of the shares issued pursuant to the exercise of stock options • Who qualifies: The definition of employee is different for ESOPs and sweat equity shares- Sweat equity can be issued to a permanent employee of the company who has been working in India or outside India, for at least the last year. No such restriction for the issue of ESOPs- ESOPs cannot be issued to an independent director whereas sweat equity can be issued to an independent director- ESOPs cannot be issued to the promoters, a person belonging to the promoter group or to a director who either himself or through his relative or through any corporate body, directly or indirectly, holds more than 10% of the outstanding equity shares of the company. The only exception to this is for founders/promoters of DPIIT recognized startups where they are eligible to receive ESOPs for up to 10 years from the date of incorporation. This restriction does not apply to the issue of sweat equity. • Dilution: The company cannot issue Sweat Equity for more than 15% of the existing paid-up equity share capital in a year or shares of the issue value of INR 5 crore, whichever is higher. Also, the issuance of Sweat Equity in the Company cannot exceed 25% of the paid-up equity capital of the company at any time. However, in case of a Startup, the issuance of Sweat Equity shares cannot exceed 50% of its paid-up capital up to five years from the date of its incorporation or registration. These restrictions do not apply to the issue of equity shares under the ESOP scheme • Exercise: For ESOPs, companies have the freedom to determine the exercise price in conformity with the applicable accounting policies. For Sweat Equity, a registered valuer will determine the fair price for the shares and give justification for such a valuation • Consideration for the purchase of shares under the ESOP scheme can be done only in cash. A company can issue sweat equity shares to its employees at a discount or for a consideration other than cash Happy Reading! Dial A CFO Atlanta | New Delhi | Singapore CFOing | Accounting | Compliance -------------------------------------------------------------------- To subscribe to our NewsByte over WhatsApp, just write "Hello News" in Subject and email to hello@dialacfo.in or WhatsApp at https://tinyurl.com/DialACFO