ESOP Valuation

What is an ESOP?

Understanding Employee Stock Option Plans

An Employee Stock Option Plan (ESOP) is a program through which a company grants stock options to its employees as a reward for performance and long-term contribution. Under an ESOP, employees receive the right—but not the obligation—to purchase shares of the company at a predetermined price on a specified future date.

The primary objective of an ESOP is to align employee interests with those of shareholders by encouraging stronger performance and long-term commitment. In addition to potential financial benefits, ESOPs foster a sense of ownership, loyalty, and participation in the company’s growth.

Why Obtain an ESOP Valuation?

An ESOP valuation is required for accounting and tax purposes. From an accounting perspective, companies must recognize employee compensation expense over the vesting period of ESOPs in accordance with applicable accounting standards. This expense impacts the company’s profitability and earnings per share (EPS).

From a taxation standpoint, ESOP valuation determines the perquisite tax payable by employees at the time of exercise. Inaccurate or poorly planned valuations can result in higher tax liabilities, reducing the effectiveness and attractiveness of the ESOP scheme.

Approaches and Methodologies for ESOP Valuation

In India, accounting for Employee Stock Option Plans (ESOPs) is governed by Guidance Note 18 on Accounting for Employee Share-Based Payments (2005 edition) issued by the Institute of Chartered Accountants of India (ICAI).

ESOP valuation can broadly be carried out using the following two approaches:

Under this method, the value of ESOPs is derived based on the underlying value of the company’s shares. The share value is determined using commonly accepted business valuation approaches, including:
  • Income Approach
  • Market Approach
  • Asset-Based Approach
This method values ESOPs using option pricing techniques such as the Black-Scholes Model or the Binomial Model. These models consider factors including:
  • Current share price
  • Exercise price
  • Expected volatility
  • Expected option life
  • Risk-free interest rate

When is ESOP Valuation required?

ESOP Valuation in India is required for Grant Pricing, Expense Recognition, Tax Compliance, and Buybacks, aligned with IND AS 102, Income Tax, FEMA, and SEBI.

01

Grant of Options

Valuation of Shares at the Time of Grant under IND AS 102 and Income Tax Rules.

02

Exercise of Options

Fair Value Determination for Taxation of Perquisites at Exercise.

03

ESOP Buyback

Valuation for Repurchase of Employee Options by the Company.

04

Sweat Equity Shares

Valuation for Issuance of Shares to Employees or Promoters as Compensation.

05

Accounting & Reporting

Valuation for Recognition of ESOP Expense under IND AS, IFRS, or US GAAP.

06

Fundraising

Updated Valuation for Pricing Options in line with New Share Issuances.

07

Employee Exits

Valuation for Settlement of Vested Options during Resignation or Termination.

08

Startups & Unlisted Companies

Valuation for FEMA and Income Tax Compliance in Startup ESOPs.

09

Mergers & Acquisitions

Valuation for Conversion, Cancellation, or Substitution of Employee Options.

Our Approach

ESOP
Valuation Process

Our ESOP Valuation Process ensures Audit-Ready and Regulator-Compliant results under IND AS 102, Rule 11UA, FEMA, and SEBI Guidelines. The steps below outline how we move from Plan Data to a Defensible Valuation Report.

1

Define Scope and Purpose

Identify Plan Terms, Award Type, Grant Date, Reporting Need, and Compliance Timelines.

2

Collect Data and Inputs

Compile Cap Table, Share Value, Vesting Schedules, Volatility, Expected Life, and Yields.

3

Select Model and Apply

Use Black-Scholes, Binomial, or Monte Carlo based on Award Terms and Conditions.

4

Issue Report and Schedules

Prepare Fair Value Reports, Expense Tables, and Notes for Audit and Regulatory Review.

ESOP Valuation Process

Trusted ESOP
Valuation

Accurate Valuation for Employee Equity

We deliver Independent ESOP Valuation Reports within 7–10 days, fully compliant with IND AS 102, Income Tax, FEMA, and SEBI, and accepted by Auditors and Regulators.

It determines fair value of shares granted to employees.

ESOP valuation is required for accounting, tax compliance, and regulatory reporting purposes.

ESOP valuation is governed by IND AS 102, Income Tax Act, FEMA, and SEBI guidelines.

At grant, exercise, buyback, fundraising, and during financial reporting.

Common methods include Black-Scholes, Binomial, and Monte Carlo models.