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Sweat Equity vs Stock Options (ESOP)

Key differences: Sweat Equity and Stock options

Employee compensation has taken various forms over the years. Payment of salary no longer involves just a cash component, it also includes payment in the form of stock options, sweat equity, stock appreciation rights, to name a few. The growth of startups has contributed to developing these smarter compensation strategies. Employees have also responded positively, thus creating some observable trends in the market when it comes to different compensation avenues.  

A popular saying goes, sweat, determination and hard work builds a dream. In every true sense employees in an organisation put their sweat and soul to it when it comes to building the dream company. This has given rise to two distinctive concepts of employee compensation in the legal parlance which are 1. Sweat equity shares 2. Employee stock options. At the initial instance both may sound similar but are strikingly distinct in legal concepts. While we have previously discussed at great length on how stock options generate wealth for  employees, in this blog, we highlight some key differences between stock options and sweat equity.

Differences in functioning and rights

Stock options and sweat equity

Differences in operations

Stock options and sweat equity

Both concepts as seen are very different. While sweat equity  can only be issued to a limited number of employees, stock options on the other hand can be issued to any number of employees as long as the plan approves such grants.

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