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Why ESOPs matter

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A close look at liquidity in an ever-changing landscape

Employee Stock Ownership Plans (ESOPs) are increasingly finding a favourable spot in pay packages offered especially by new-age, tech startups at the time of appraisals or hiring. The aim is to keep employees motivated by giving them a sense of ownership through fair compensation and the promise of a future windfall. ESOPs typically come with a vested period within which employees cannot sell these shares. 

However, once this period is over some companies kick off a buying back exercise to help employees liquidate their shares. 

This trend particularly gained momentum when Flipkart announced a 100% buy back of vested ESOPs in 2018. Since then about 23 startups have launched buyback programs, with most of them taking place after the pandemic broke out. In one such buying back exercise, Zerodha, a financial services company, allowed 700 employees to sell 50% of all vested stock options in a ESOP buyback plan of ₹60-65 crore. 

ESOP liquidity helps build trust among employees.  Additionally, the tapering cash flows due to the pandemic had several companies turning to ESOPs to compensate employees for any deductions in salaries. 

For instance, Meesho, the social-ecommerce company, conducted 2 rounds of ESOPs that added up to $5 million. Employees ranging from juniors to senior leadership participated, where they could exercise the option of selling up to 100% of vested ESOP shares. Meesho claims the buyback rewarded employees and accelerated the company’s growth by 4x as compared to pre COVID-19 times. Today other notable names such as FirstCry, BharatPe, Urban Company, and RazorPay have followed suit. 

Apart from employees and employers, there is yet another group of individuals interested in ESOPs — investors! 

Unlisted companies have always been on the watchlist of investors. And now they too have taken up a keen interest in getting a hold of stocks sold by employees. This typically happens when there is a strong possibility of the company being listed or when companies get a high valuation from venture capitalists. Simply put, for investors buying ESOPs, these are basically shares of unlisted companies that they could buy and create higher liquidity for employees and the company. Also when it comes to HNIs, they have a risk appetite for being able to invest in avenues like private equity, angel funds, startups etc. And investing in ESOPs of unlisted companies becomes an extension of the different investment opportunities. 

Creating liquidity in ESOPs helps employees to monetize their investment and investors get their share of the pie in an unlisted company. 

However in the case of listed companies, employees can sell their shares in an open market at prevailing market prices when their lock-in period has come to an end. ESOPs are a great way of making employees co-owners of the company. And for organisations it becomes a significant part of compensation structures, especially for senior level employees — while liquidity events allow employees to monetise a portion of the shares and help organisations reach their cash flow requirements. 

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