Many startups offer employee stock ownership plan, or ESOP, to employees. Recently, Whatfix, Digital Adoption Solutions, announced it has implemented ESOP buyback of $4.3 million (Rs 32 crores) for its employees. Whatfix is granting employees the option to liquidate up to 35 percent of their vested Esops. Earlier, Grofers said it will offer a 33 percent hike in salary to its tech team effective July, along with a "hefty ESOPallocation" as the online grocery delivery platform looks to retain staff and woo more tech talent. Many others like Meesho, Zerodha, RazorPay, CarDekho among others have offered ESOPs.
When startups offer ESOPs to employees, it is positive signal of their talent, and work with the company and more importantly, it serves as a tool to retain key talent. And not everyone gets it. ESOPs become available (vested) once the employee spends the agreed amount of time in the startup. The employee gets shares of the company at a nominal rate and as the startup grows, he/she can sell them and make a profit.
There are other reasons why employees opt for it, says Gaurav Perti, Founder and CEO, PurpleTutor- Mumbai based edtech startup teaching coding/computational sciences to children. "ESOPs are a financial instrument that allows employees to generate serious wealth over and above their salaries. Secondly, they give a sense of ownership to employees (apart from founders/early-stage members) to be a part of the start-up’s journey and their performance rolling up to the collective performance of the venture that will generate handsome returns".
However, ESOPs are also a strategic device used by startups considering they don’t always start with a huge market capital. “In the initial days it becomes very important for startups to balance talents and funds. To achieve this, startups offer ESOPs which gives a sense of ownership to the employee who maintains the salary expenses based on the startup’s needs,” said Fahim Alam, CEO at The Better Co, a New Age end-to-end technology-driven construction company.
Most buybacks that take place will happen through secondary sales to new investors. The company usually announces the buyback option to employees after fixing the price. Those employees who have options that are vested can exercise the same. The employees can do partial or full liquidation. Hence employees get paid after their vesting period when a buyback takes place.
Employees opt for ESOPs because it’s a great opportunity to become a part of the growth story of the startup and encash monetary gains after a certain amount of time. “It is a life-changing opportunity to get a safety net around their career at a much earlier phase in their jobs,” said Suresh Narasimha, Co-founder of CoCreate Ventures, which runs microfunds to invest in a pre-seed stage. “Employees of Flipkart, Infosys, Wipro or even those who worked for US-based companies like Contrail, Voltera etc., have been actively investing as angels and are big contributors to social experiments in India,” he said.
When employees are invested in the startups just as its founders and cofounders are, it means better bottom lines. “The more the startup grows, the more returns they get and also, employees start working even more dedicatedly to take the startup to the next level,” said Fahim Alam, CEO at The Better Co
But it is also a strategical play on the part of startups, said Alam. He says that considering startups don’t always start with a huge market capital, it becomes important in the initial days for them to balance the talent and funds. “To achieve this, startups offer ESOPs which gives a sense of ownership to the employee maintaining the salary expenses based on the startup’s needs.”