E-S-O-P is the buzzword for startups. Employee stock ownership plans (Esops) are being created, re-created and encashed in full swing in the ecosystem currently. Earlier this year, furniture startup Urban Ladder decided to offer Esops to employees, while budget hotels marketplace Oyo approved a new Esop plan for 2018. Cab aggregator Ola meanwhile allowed the encashment of Esops post-Temasek Holdings buying shares worth $ 30 million in the company. And Flipkart, post its $16 billion acquisition by American retailer Walmart, allowed Esop encashment at $125-129 per share.
"Esop is now becoming the norm in the Indian startup sector. I believe this trend will stay for long," says serial entrepreneur Amit Gupta, co-founder of InMobi and CEO of bicycle renting company Yulu.
Experts say talent is the number one factor that forces startups to issue Esops. The concept started as a retention tool in the USA in the 1980s and came to India when Infosys, itself a startup in the 80s, introduced Esops for its employees.
Today's new-age startups are solving tough problems that require committed and capable people to work towards a common vision, says Gupta and "Esops help people get a fair share of the upside in the company due to their hard work and impact. Esops bring a unique culture where the success of the company and the team is more important than merely individual success.''
According to Pankaj Karna, founder and MD, Maple Capital Advisors, Esops are a great way to create convergence with the goals of the founders and stakeholders and bring in a cultural orientation of performance, commitment and customer satisfaction, thereby enabling superior brand equity for the startup.
Esops, believe experts, help startups gain an edge over not only competitors but MNCs as well. Bala Parthasarathy, CEO and co-founder, MoneyTap, says being cash-strapped in their early days, startups cannot pay the high salaries of MNCs. ''So giving a stake to the employees in exchange for loyalty (as they have to stay a certain period to reap the benefits) is an excellent trade-off." And for employees, they get to own a small share of the startup. "This feeling of ownership drives them towards goals. Esops is a great retention tool as it attaches employees to both the positive and negative business outcomes, making them intrapreneurs," says Archit Gupta, founder & CEO, ClearTax.
Furthermore, Esops are a huge reward if the startup succeeds. Case in point being Flipkart. A Flipkart employee owing say 10, 000 shares can make more than Rs7-8 crore at $125 per share (post-Walmart deal). "Employees, of course, take the risk of their stocks being worthless if the startup fails. But every startup pays salaries on top of the Esops, so the risk-reward trade-off is still worth it,'' says Parthasarathy.
However, all said and done, Esops do carry certain challenges, mostly from an employee perspective. Esops are not very tax efficient, says Vikas Lachhwani, co-founder of the startup MCaffeine. "Employees need to bear the taxes on the exercise of the options, even if there is no imminent exit. In the uncertain startup environment, this tax is a significant burden." Moreover, since Esop is an option to buy a share, the option can expire when an employee leaves a company, forcing a choice between forfeiting the option or converting the option to shares, says Parthasarathy. "This is fine if they can sell their shares afterwards at the marketplace. But in private companies, that's not an option. So, employees could end up paying taxes to the government for a share of the company in their hands without realizing the value of that share. If the "implied value" of that share is, say Rs. 1000, they would have to pay Rs. 300 in taxes but not sell the Rs. 1000 share of the market. This is the tax law that needs to be changed."
Also, experts say often, the HR and finance departments in a startup are not adequately trained in managing Esops. "As a result, they can mishandle the paperwork causing huge tax implications for both the startup and the employees,'' says Parthasarathy.
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