Benefits of ESOPs to startup employees
Photo by Artem Beliaikin
ESOP for Founders

How ESOPs enhance a startup employee’s career

“You need an employee who behaves like James Bond!
Such employees are invaluable assets.”
Sam Altman, CEO, OpenAI & former President, Y-Combinator

Any startup success story today is built on the backs of these “James Bond” like employees, folks that are resilient and go beyond the call of ‘duty’ to deliver – engineers, marketers, managers that make the founder’s mission their own!  Our conversations with several unicorn founders have revealed that their exponential growth results from hiring and retaining top-notch talent. 

Today, high attrition is one of the biggest challenges founders face. Employee attrition is a real problem for founders and HR managers, whether it is better job offers from competitors, a feeling of not being recognized enough, or simply just burnout due to the fast-paced nature of work. To address this predicament, companies require solutions that instill loyalty in employees. And a simple solution is incentivizing employees from the get-go by making them co-owners of the startup. This is where ESOPs (Employee Stock Ownership Plans) take center stage. 

Think of an ESOP as a long-term incentive scheme made available to early employees as a gesture of faith and with a promise for outsized returns. While the employer can minimize attrition, the employee gets steered toward the organization’s vision and continues to perform to the best of their caliber. But, how exactly do employees benefit from ESOPs?

As a wealth creation plan, an ESOP essentially gives an employee the option to buy a certain amount of company stocks either at market value or a discounted price.
Employees with ESOPs, therefore, become potential stakeholders of the company. As per the stipulated time frame defined in their ESOP scheme document, employees can actually buy the stocks once provided to them as an option. Post this; they can either monetize all or some of these stocks when the company announces a liquidity event like a buyback, secondary sale, or an IPO (Initial Public Offering). This complete or partial monetization of ESOPs (if the startup has done well and has considerable valuation) will exceed the employee’s standard remuneration. If an employee chooses to quit before exercising ESOPs, the company generally buys back the Fair Market Value (FMV) stocks. In simple terms, ESOPs empower employees with a monetary edge.    

A study titled ‘The Human Capital in the New Economy – Benchmarks and Best Practices 2019’ by Trifecta Capital, a venture debt firm, reveals that more than 50% of Series A startups have an ESOP pool larger than 7.5% when compared to an approximate 30% of growth-stage startups. According to the study, “Founders have excelled at articulating the proposition of ESOPs to attracting senior talent, while prospective talent is positively predisposed to seeking it.” 

Deepak Abbot, a former senior VP at Paytm, says, “ESOPs for long have been undervalued in India, but many success stories of employees creating wealth through ESOPs and eventually building their own startups have slowly started to build a strong culture of wealth creation among employees.” Deepak hitrica equitylf is now taking the entrepreneurial plunge. Other notable examples of employees turned entrepreneurs are Sameer Nigam of Flipkart, who co-found PhonePe. Ankit Nagori & Mukesh Bansal of Flipkart founded CureFit, Nitin Agarwal of Ola, co-founded Pianta, and ex-Flipkart employees Sujeet Kumar, Amod Malviya & Vaibhav Gupta, who founded Udaan. 

Sonu Iyer, Partner & National Leader – EY India, says in the ‘EY Annual Report for ESOPs 2019’, “Amongst different variants of share-based incentive plans, ESOPs remain to be the most popular amongst employees.” She further adds, “When offered to a carefully chosen set of employees and tied to objective criteria that are business relevant, ESOPs show a high delivery success.”   

Here’s an example: The IPO of IndiaMART in July 2019 resulted in its ESOP-privileged employees earning millions. The company offered 4.89 million shares (at face value of INR 10 each) on the NSE & BSE, and the issue price of each share was listed at INR 970-973. As a result, 10,000 shares were reserved for employees at a discount of INR 97 per share. As a result, the stock shot up 40% on the listing, and today, the stock is trading above INR 2000 per share. A similar trend was observed when JustDial, QuickHeal, Info Edge, and went public. 

Even in privately held companies like Flipkart, PolicyBazaar, Blackbuck, RazorPay, and Unacademy that have had progressive ESOP policies and regular liquidity events, the wealth creation for employees has been tremendous. Recently, Razorpay offered an ESOP share buyback plan to 400 employees. As part of this plan, employees who hold ESOPs will be able to sell up to 30% of their vested shares at a premium. Both former and current employees made substantial profits due to this buyback plan (the actual numbers are, however, undisclosed!).

While companies leverage ESOPs as a retention tool and growth multiplier, employees benefit from the overall process. To summarize, ESOPs pave the way for employees to:

  • Boost personal wealth (through equity ownership)
  • Grow professionally (as primary contributors)
  • Improve job security and satisfaction
  • Actively participate in decision making

As companies grow multi-fold, they understand the value of loyal employees. By offering ESOPs as a reward scheme, companies can retain employees whose performance is stellar and at the same time, attract those who can be potential assets to the startups. 

To learn more about ESOPs, you can read our other blog on creating a strong ESOP Policy.
If you are looking for an easy-to-use tool to create your ESOP policy and manage ESOPs for your team, check out trica equity.

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