Rights issue and employee stock option plan both terms are used in the context of stock markets, companies need funds on a regular basis and sometimes profits and reserves are not sufficient when the company is looking to expand its business and that is where rights issue as well as employee stock option plan come into play. In order to understand both terms, one should look at the difference between rights issue as well as employee stock option plan –
Rights Issue VS Employee Stock Option Plan
Meaning
Rights issue in simple words refers to that issue in which listed company gives right to the existing shareholder to purchase shares of the company at discounted price to market price while employee stock option plan refers to that plan under which company gives its employees ownership interest by issuing stock to existing employees of the company at a predetermined price irrespective of the current market price of the stock of the company .
People to whom Stocks are Issued
In case of rights issue company issue shares only to those people who are already shareholders of the company and not to general public or employees of the company but as far as employee stock option plan is concerned it is meant for the employees of the company and neither the current shareholders or the general public can apply to such options.
Purpose of the Issue
Company issue right shares when they are in need of funds due to expansion requirement or working capital requirement of the company while ESOP is issued by the company to reward their employees or make their employees happy and ensure that employee remains in the company for a long time.
Sale of Shares
In case of rights issue once shareholder get the allotment of right shares he or she can immediately sell those shares at current market price because in case of rights issue shares are credited quickly into the trading account of shareholders but as far as employee stock option is concerned employees cannot sell the shares immediately as there is lock-in period which ranges from 6 months to 5 years or 10 year. In simple words rights issue is like an ATM, just like in an ATM we can withdraw cash immediately in the same way right shares can be sold immediately whereas ESOP is like a fixed deposit just like fixed deposit matures after a fixed period of time in the same way ESOP can be exercise only after some time and not immediately.
Listed and Unlisted Companies
In case of rights issue only listed company can issue right shares but as far as employee stock options are concerned they can be issued by both listed as well as unlisted companies as ESOP in case of unlisted company gives employees option to exercise their right whenever company list its stock in market or when promoter sells the company to other listed companies.
As one can see from the above that although both rights issue, as well as ESOP, results in an infusion of capital into the company but there are many differences between the two terms and you should be aware of above differences.