Example of ESOP
- Initial Setup: ABC Corporation sets up an ESOP and contributes $1 million in cash to the ESOP trust.
- Share Purchase: The ESOP trust uses this cash to purchase 10,000 shares of ABC Corporation.
- Allocation: These shares are allocated to employees based on their salaries. An employee earning 10% of the total payroll might receive 1,000 shares.
- Vesting: The company has a five-year cliff vesting schedule. The employee fully owns the 1,000 shares after five years of service.
- Annual Valuation: Each year, an independent appraiser values ABC Corporation’s shares to update the ESOP account values.
- Departure: After five years, the employee leaves the company and receives the value of their 1,000 shares, either in cash or in shares, based on the current valuation.
What is Vesting Period ?
Vesting Period can be defined as the minimum duration for which the employees have to wait to claim the benefits of ESOPs. (The vesting period of different companies can vary as per their rules.)