Startup employees pocket $ 100 million from ESOPs in first half of 2021


Big tech companies in India are looking for ways to reward their employees, including through employee share buyback plans (ESOPs). In the first half of 2021 itself, a dozen companies announced their ESOP buyout plans worth more than $ 100 million.

FintrackrResearch shows that companies such as Udaan, ShareChat, Razorpay, CRED and several others had already bought up to $ 73 million in shares held by their employees. Meanwhile, Zerodha became the biggest buyer of ESOP in 2021 (so far) with $ 27 million. The transaction is said to be ongoing.

Active employees of B2B e-commerce unicorn Udaan unloaded ESOPs worth $ 23 million to the company’s investor as part of a secondary share buyback program in April. ShareChat, which achieved “unicorn” status in April, has bought back more than $ 19 million from ESOP from current and former staff.

Except that, reports suggest that large e-commerce Flipkart is considering a mega ESOP buyout plan worth Rs 600 crore as part of its recent fundraiser.

Both ESOP buybacks and secondary share buybacks by investors have increased over the past two years, which investors say is a sign of the maturity of the ecosystem.

“These deals show that the Indian startup ecosystem has matured and is on par with evolved ecosystems like Silicon Valley in terms of adopting best practices,” a venture capitalist said on condition of anonymity.

Also last year, several companies bought back shares from their employees. According to Fintrackr’s data, 12 companies including Zerodha, Swiggy, Unacademy, FirstCry, Urban Company, and Meesho bought nearly $ 50 million worth of ESOP from their employees in 2020. Swiggy and Zerodha have proven to be the biggest creators of wealth for their employees last year with $ 9 million in buybacks each.


How the culture of ESOP has evolved over the years

Prior to Flipkart’s massive takeover of ESOP in 2018, stock ownership was not a standard or popular practice for startups and their employees. But as hundreds of former and former Flipkart employees received large payouts after Flipkart set aside $ 500 million to buy their shares, the attitude towards ESOPs began to change as a result. potentially valuable instrument.

Around this time, Flipkart bought ESOPs from hundreds of employees and many of them became millionaires. In the same year, around 300 Paytm employees also sold their shares worth Rs 300 crore to Canadian company Discovery Capital as part of a side transaction.

As a result of these wealth-bearing events, confidence in ESOPs has multiplied and strengthened over the past two years, with many companies buying out ESOPs or facilitating liquidity to former and existing employees through side agreements. .

Employees play a central role in the success of any startup. Along with the co-founders and funders, employees are involved in shaping and achieving the purpose of the organization. Therefore, they deserve to be attributed through such redemptions and secondary transactions.

“We have hosted three ESOP buyout events in the past four years and they have proven to be a boost to employee confidence. These withdrawals help achieve individual goals and give them a sense of ownership, which ultimately translates into efficiency and greater accountability, ”said Abhiraj Bhal, co-founder and CEO of Urban Company.

So far, Urban Company has sold $ 8.5 million worth of shares through the company’s ESOP. buyback and secondary programs in 2017, 2018 and 2020.

In high growth companies, buying ESOP seems to be the only way to increase or allocate participation to new investors. According to the VC cited above, the founders of Unicorn or Decacorne do not want to dilute their stake. “Finding a place in such companies is difficult for investors and buying part of employee shares has proven to be a popular practice,” added the VC.

Startups have added shares worth $ 700 million to their ESOP pool since January 2020

In addition to offering outings to ESOP holders, nearly 20 companies have expanded their ESOP pool in 2020. According to FintrackrBy 2020’s estimate, collectively they had grown their ESOP pool by more than $ 530 million. Byju’s and Oyo topped the list with an additional $ 208 million and $ 143 million, respectively. Swiggy, ShareChat, Unacademy, and Rebel Foods were other top startups to expand their ESOP pool in 2020.

According to experts in recruiting and people management, the ESOP component is a must when startups are recruiting in all functions, from CXO to mid-level. “Typically, the ESOP component is between 60% and 100% of annual pay (read CTC) for junior level employees, while it goes up to 3 times for middle management positions,” he said. One of the senior executives of a solidifying consulting firm The person requested anonymity because they are not authorized to speak to the media.

“In the case of CXO level positions, the ESOP component climbs up to 3-4X of the CTC or even higher if the candidate is highly qualified and has a proven track record,” the person added.

The expansion of the ESOP pool by several growth-stage companies also continues in 2021. As of June of this year, nine companies had expanded their pools to the tune of $ 170 million. The number is likely to double in the second half of the current year, says a venture capitalist who declined to be named.

The challenges continue to prevail

The rapid pace at which the allocation, expansion and buyout of ESOP has gained momentum in India is a good sign, the way it is taxed continues to be a challenge for employees. After acquisition, if an employee wishes to exercise their ESOPs, they must pay capital gains tax. Capital gain is essentially a tax on the price difference between fair market value and strike price.


“This must be resolved because the current taxation is very severe. Why would anyone pay a capital gain to exercise the ESOP that they didn’t make any money on, ”said Deepak Abbot, co-founder of indiagold. “The government should only tax ESOPs when the person collects them. If that happened, confidence in ESOPs would increase many times over.

Currently, many ESOP holders in all companies do not exercise their ESOPs because they do not want to pay capital gains tax. Two years ago, the government recognized the problem and eased the tax burden on employees by deferring the payment of tax for five years or until they leave the company or sell their shares (depending on the first possibility). But the catch was that it only applied to companies recognized under the Startup India program.

This too comes with a caveat. Startups under this program that request a tax deferral for ESOPs must obtain special permission from the income tax department. According to experts in charge of ESOP-related taxation, less than 1% of startups (less than 500) under the Startup India program have qualified for such relief.

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