It is no secret that India’s vibrant startup ecosystem is the third-largest in the world. In the past five years, startups in India have created close to 5.5 lakh jobs and with an even younger workforce, these figures are only set to grow. One of the main reasons why so many young people and millennials are drawn to working at startups is because of the perks that are up for grabs. Along with flexible working hours and remote working options, there are several financial benefits that are offered. And one such benefit is that of Employee Stock Option Plans or ESOPs.
What is an ESOP & how does it work?
Unheard of up until 1974, ESOPs now find a staple mention in the startup world lexicon. According to The National Center for Employee Ownership, there are close to 6,460 ESOP plans in existence, covering 14.2 million people across the US.
In India too, more and more organisations are inclined to opt for ESOPs; KPMG’s India ESOP Survey 2021 in fact indicated that, spurred by their overseas parent, 53% of companies in India have offered ESOPs to their employees.
Employee stock ownership plans (ESOPs) are a type of employee benefit plan that allows employees to own a portion of the company. Through an ESOP, employers allocate a certain percentage of a company’s stock shares to a qualifying employee with no upfront cost involved. These shares are then held in a trust structure to keep them safe and let grow until an employee retires or decides to exit the company. After which their shares are bought back by their employer i.e. returned to the company.
Objective of issuing ESOPs
- Attract Talent: The startup world is characterised by cutthroat competition with companies going to startling lengths to woo talent. From handsome joining bonuses to perks such as iPhones and BMW cars, startups across the world are willing to go the extra mile in order to attract the best talent in the industry. In such an environment, ESOPs work as a great reason for candidates to consider a company.
- Reward: Once employees are with a company, retaining them for the long-term becomes a challenge. ESOPs are thus primarily used as a tool to reward employees for their dedication and hard-work, and most importantly their loyalty to a company.
Benefits of ESOPs
- Sense of Ownership: By giving employees a stake in a company’s growth and profit, ESOPs can act as great motivators. Employees feel like they are more than just workers filling a position, they move on to becoming owners in the company. ESOPs can thus give an employee a sense of belonging because they too now have a slice of the pie and real stake in the company’s growth trajectory. This can motivate them to take greater ownership of projects and become better team leaders.
- Wealth Creation: For employees, ESOPs are a real chance at creating true personal wealth. While monthly salary and other savings plans help employees to get by and meet their daily expenses, ESOPs give them a shot to create a corpus of funds that they can grow and use for a variety of purposes. In many ways, for employees, ESOPs are the stepping stone to creating long-lasting generational wealth. This increase in personal wealth can even help to beat inflation which is a perennial possibility in the Indian economy.
- Sense of Belonging: ESOPs aren’t handed to employees arbitrarily. Employers usually assess employees over a period of time; decisions are based on their intention to commit long-term, level of dedication and performance reviews. Once it is determined that an employee is a truly valuable asset, ESOPs are presented to them. However, once this is done, ESOPs can go a long way in giving employees a sense of belonging. By telling an employee that they are worth more than just a paycheck, companies can foster a sense of wellbeing and affinity.
- Lower Attrition: For employers, ESOPs can help to retain employees for longer periods and this can lower attrition rates overtime. This can in turn contribute to increased stability and better reputation for companies.
ESOPs are thus a win-win tool for both companies and employees. However, like in most situations, it is always important to approach ESOP agreements carefully. Employees should make sure to go over their contracts and the ESOP taxation details. It is also advisable to discuss an ESOP agreement’s clauses with a financial planner before signing on the dotted line. And last but not the least, true wealth creation takes time and ESOPs too should be approached keeping a long-term approach in mind. ESOPs do not yield miraculous results overnight; their true benefit shines only when they are allowed to grow over a period of more than a few years.
The article has been written by Mr. Milan Ganatra, Founder & CEO, 1SilverBullet
Milan Ganatra is a Serial Entrepreneur as well as Founder & CEO, 1SilverBullet. A first-generation entrepreneur, Milan has carved a niche for himself in custody technologies, leading the field with his various ventures. Former Chief Executive Officer (CEO) and Co-Founder at Miles Software, Milan is now closely involved in his multiple ventures in the fintech space that include 1 Silver Bullet, Financepeer & Finalyca.