Even though Tapan calls himself a corporate strategist, entrepreneurial thinker and a result-oriented problem solver, the one thing that keeps him going is unearthing ways to add value in his work. He also firmly believes that the financial department of an organisation plays a pivotal role in operational excellence and impacting the company’s bottom-line. In his career of over 15 years, Tapan has worked as an Investment Banker, Analyst and Chief Financial Officer at companies like Baazi Games, Car Dekho, Fidelity International and Moody’s Analytics Knowledge Service. In his current role at SugarBox, he is responsible for building a tech-based financial infrastructure, investment banking, business partnerships, planning and budgeting. Tapan is a Chartered Accountant by qualification and also holds a Bachelors in Commerce from Panjab University.
In the modern era of tech start-ups, innumerable factors (ranging from fancy offices, spending on employee welfare, at par or even higher salaries compared with American and European countries) have played an important role in creating a great business (turning start-ups into unicorns) with a happy and productive culture. One of the definitive contributing factors has been the introduction of ESOPs (Employee Stock Ownership Plans) by the start-ups.
What do start-ups like Flipkart, Swiggy, RazorPay, SugarBox Networks, Nykaa, Oyo, Zomato, Zerodha, Unacademy, CarDekho, and PhonePe have in common? Besides being some of the most successful entrepreneurial brands around, they are also part-owned by their employees, that is these companies have issued Stock Options to their employees.
Infact, today several growth-stage companies have expanded or created new ESOP pools for their employees. The year 2021 was a dramatic year, when the world was fighting the Covid-19 pandemic, Indian start-ups attracted investments of approximately US$36 billion and ESOPs became the talk of the town when 35 senior management members (Excluding Founders) of various start-ups entered the Rs 100 Crore stock options club. With ESOP buyback programs worth around $440 million through the year, India witnessed an eight-fold jump in ESOP buyback as compared to the previous year. Out of 43 start-ups that turned unicorns in 2021, more than 15 start-ups provided ESOP liquidity programs for their employees, enabling wealth creation opportunities for them.
The year 2022 is already witnessing ESOPs becoming a crucial component of an employee’s compensation package. In a country that witnesses two new start-ups every hour, ESOPs are becoming a powerful tool to supercharge growth, strengthen organizational performance, and create wealth for both, founders and employees.
Enables Ownership and Motivation to Go that Extra Mile
ESOPs are nothing but a share in the cap-table of the company and once you join the cap-table, you gain a part of the ownership, in the company. The ownership aligns with the interests and financial benefits, motivating employees to go that extra mile to achieve growth and success (for the company). With the faster pace of growth, employees obtain financial benefits as the value of their ESOPs will grow in proportion to the increase in the valuation of the start-up.
“When the value of ESOPs is linked to the company’s success, employees start thinking and acting like founders (like they are working for themselves).”
Helps Attract and Retain Talent
A robust ESOP policy generally has a standard vesting period of 4 years, with a 1-year cliff. This means an employee receives 25% vesting at the 12th month mark, 50% vesting at the 24th month mark, 75% vesting at the 36th month mark and 100% vesting at the 48th month mark. If an employee leaves within 12 months, he/she forfeits all stock options and if an employee leaves after 3 years, he/she will receive 75% of their allocated share options. Under such circumstances, most employees on an ESOP are motivated to stay with the company, until their ESOP has been vested. Founders generally reward additional ESOPs to employees with outstanding performances, granting additional incentive for them to stay with the company in the long term.
“ESOPs help companies retain talent, minimize employee turnover, and ensure deep-rooted commitment”.
Helps Conserve Cash Yet Offer Competitive Compensation Packages
The industry thumb rule says – if you have an engaged employee who wants to be wealthy, you need a strong and rigorous compensation plan. Start-ups, especially those in early stages of growth, face the dual challenge of managing cash flows and attracting talented people to grow the business. In recent years, compensation packages have gone beyond the conventional salary package, at least at start-ups and other tech firms. ESOPs are increasingly in demand at these firms, as more employees seek to benefit from an organization’s long-term growth. ESOPs help companies offering competitive compensation packages to prospective candidates, in a way that does not impact the immediate cash flows. The cash conserved can be reinvested in the business to create greater financial upside.
“ESOPs is a tool for founders to stay future forward, allowing them to invest today in the company’s growth curve, so as to reward employees in the future”.
When well executed, ESOP is an excellent strategy for a company looking to strengthen organizational performance, as well as attract and retain talent. It’s no surprise then, that start-ups are sharing equity (ESOPs) with the employees at greater rates than ever. But ESOPs create value for employees only when there are liquidity events, wherein employees can sell their stock options and gain an increase in start-up valuation. Employees embrace the potential to create wealth, as long as ESOPs buyout (liquidity events) are real. If a company provides ESOPs buybacks rapidly, employees generally stay longer in the company and will not sell their options soon, as they believe the start-up valuation to increase.