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In the year 2021, when a record $36 billion was invested in Indian startups, 35 non-founder top management had joined the Rs 100-crore inventory options club, creating the possibility for wealth accumulation that employee stock options provide.

 According to top-tier entrepreneurs, the expanding membership also indicates that Esops have gone mainstream in India and are more likely to be a much larger part of employees’ pay packages sooner or later.

Employee Stock Option Plans (ESOPs) have lately had a significant influence as a result of recent IPOs and investment booms in emerging firms. This has not only altered the dynamics of the Indian economy, but it has also resulted in wealthy non-founder workers with significant stock option payouts.

35 non-founders are now members of a Rs 100-crore inventory options membership.

Recently listed esop for private companies and privately owned IT businesses in India have pushed 35 non-founder executives into the Rs 100 crore club of stock options, becoming an exclusive group inside the rapidly rising digital economy. That is consistent with information provided to ET by the government search and advice firm Longhouse Consulting.

Indian startup companies like Nykaa, Zomato, PolicyBazaar, and Paytm, as well as Flipkart Group, Byju’s, and Ola are in the list. According to Longhouses predictions, the Rs 100 crore inventory options membership will have 100 members by the end of the next year.

employee stock ownership plan

Stock options become popular: The increasing Rs 100-crore membership demonstrates two things: that Esops may result in actual wealth creation, and that 2021 was the year they became mainstream in India’s startup scene.

Several startups have undertaken critical inventory potential buybacks, particularly in the last 12-18 months. Last month, we revealed that around 40 businesses, including PhonePe, Razorpay, Udaan, Flipkart, UpGrad, Swiggy, and Spinny, had purchased back employee shares worth Rs 3,200 crore.

“Workers accept the opportunity of wealth creation as genuine as buybacks are taking place. Contrary to the widely held belief that if an employer enables Esop buybacks quickly, employees will promote and go, they will actually remain longer and will not sell their options in a hurry”

-told Harshil Mathur, cofounder and CEO of Razorpay, India

“People have realised that income increases aren’t sufficient for them to make a significant shift in their way of life or become financially independent,” He did, however, warn that employees should have such pledges formalised in writing, as well as the conditions under which shares may be provided during buybacks. Mathur said, emphasising the significance of Esops.

How Flipkart establishes India’s largest Esop pool, at Rs 17,000 crore.

Flipkart has developed an employee stock ownership plan (Esop) pool worth Rs 17,000 crore, boosting it to the top of the list of Indian internet firms that have granted employees stock options. According to information obtained by ET from government search firm Longhouse Consulting, it is used by Oyo, Zomato, Paytm, and Nykaa.

Documentation for 12 months: Esops in Indian startups have had a golden year, with more firms introducing buyback programmes and benefiting employees.

Flipkart’s Rs 600-crore repurchase was one of the biggest this year.

Meanwhile, Zomato and Nykaa earned a bonanza for consumers and employees after they debuted on Indian markets earlier this year. We previously revealed that Zomato’s stock market debut produced 18 millionaires.

ShareChat, a regional language social media network that joined the unicorn club in April, pulled together an Esop pool of Rs 462 crore.

ESOPs Altered their Way and Momentum

In fact, regardless of the potential for income creation, employees have obstacles when it comes to Esops. Consultants indicated that they include taxation points when exercising the options, infrequent liquidity programmes, and long-drawn vesting schedules.

“The primary worry remains taxes at the time of exercise, unless startups are registered under Part 80-IAC and exempted by the Revenue Tax division under Part 56. Less than 300 enterprises gain tax exemption, accounting for less than 0.5% of all startups in the country,” said Deepak Abbot, a former Paytm official and the founder of gold mortgage lender Indiagold.

Vesting timeframes are also frequently out of step with the pace of business development, as businesses have received unicorns in months, according to Pallavi Nautiyal, regional head of Qapita, an equity administration platform.

Repeat taxation – in the form of perquisite tax while exercising options – and capital beneficial assets tax during liquidation are two other challenges that workers confront, according to Nautiyal. “When employees exercise their shares, they should pay taxes on the notional beneficial assets immediately,” said Abhishek Goyal, co-founder of information portal Tracxn.

The emphasis on employee stock option programmes has shifted as a result of the massive infusion of funding into these start-ups. Known for creating a growth-oriented workplace, they are enthusiastic in granting ESOPs to its employees and have utilized it as a tool to attract new talent on several occasions.

Esops for private Companies may also undertake employee buybacks, resulting in a windfall for their employees. It enables workers to concentrate on their investments with the knowledge that the firm is focused not just on its own success but also on ensuring that the employee develops with them. It creates a pool of wealth creation for its employees, contributing to the company’s growth while building on retirement savings that greatly outnumber the retirement plan alternatives that the employee would otherwise have to execute. Razorpay, for example, does a repurchase at least once a year. Udaan, UpGrad, Swiggy, and the Flipkart Group have also lately begun buybacks.

A raise in pay is not the only criterion that an employee looks for in a promotion. A desirable lifestyle necessitates unusual pay arrangements, and as a result, ESOPs have grown in popularity in recent years. Gone are the days when people would only consider one source of income as a means of accumulating wealth. Their sources of income and holdings must be broad, just as their investment strategies must be. According to the Longhouse Consulting business, the holdings of these 35 workers attest to that, and we couldn’t agree more.

Employee Stock Option Plan

An employer may provide its workers the chance to participate in a stock option, stock appreciation right, or a genuine employee stock purchase programme under the law.

Employee stock option programmes are widely used by businesses to pay, retain, and attract employees. Employee stock option schemes are not intended to be retirement plans. Employee stock options plans, on the other hand, are contracts between a firm and its workers that grant employees the right to purchase a particular number of the company’s shares at a defined price within a specified time period. The set price is also known as the grant or exercise price. Employees who have been awarded stock options expect to earn by exercising their options to purchase shares at the exercise price while the shares are trading at that price.

Five Reasons To Have Employee Stock Ownership Plans (ESOPs)

Employee stock ownership plans (ESOPs) have grown in popularity over the last decade as public awareness has grown and traditional ways of exit strategy have diminished. Historically, it was usual for a business owner to transfer ownership of their firm to their kid or another heir. However, in recent years, new generations have shown a desire or inability to take over the family enterprise. This has prompted business owners to explore other exit plans other than mergers and acquisitions, which is how ESOPs came to the fore.

The advantages of implementing an ESOP are many, benefiting both owners and employees. Here are five positives to think about:

Greater Efficiency

The majority of the ESOPs we work with are in businesses that value employee loyalty but have low 401(k) participation.Individual workers will profit directly from a business’s success and will feel a sense of ownership since an ESOP gives them a stake in the company. Companies that provide employee stock options may see better productivity and overall performance as a result. When employees have a financial stake in the firm, their morale and trust in the organisation may improve.

Alternative Exit Strategy for Aging Property Owners

As previously said, the practice of handing along family companies is becoming less popular. Furthermore, because COVID-19 delayed merger and acquisition (M&A) activity, company owners wishing to retire had fewer alternatives. If an ESOP is established, owners will not have to sell their company to a third party; they can trust that it will be kept by the employees. They can also keep their information secret and avoid disclosing it to prospective buyers.

Owners who wish to remain associated with a firm for an extended length of time might contribute shares to an ESOP over time rather than all at once.

Tax Benefits

Multiple tax benefits are available with ESOP schemes. Contributions to ESOPs are tax-deductible for C-corporations, and the amount held by the ESOP is tax-exempt for S-corporations. Employees are not taxed on their contributions. Individual employees, like in a traditional retirement plan, must only pay taxes on the ESOP when they take the funds after retiring. Furthermore, stock donations, as well as contributions used to repay ESOP loans, are tax deductible.

Attracting Top Talent and Retaining Employees

Employees who leave a firm after less than two years frequently lose their stock options. When an employee leaves after four years, they may be entitled to 40% of their shares. This vesting procedure, or the amount of time an employee must work for a firm before they are eligible to get their share payout, encourages employees to remain as long as possible in order to earn the biggest payout if and when they decide to leave. Having the option to own a piece of a firm may be an appealing perk for top personnel looking for new possibilities, since it gives a solid retirement plan.

There is no change in governance

When an owner pulls back from their firm with an ESOP in place, they won’t have to worry about the disruption that a change in governance generally causes. This enables the organisation to preserve long-term relationships with suppliers, distributors, and clients while also keeping management on board. Employee loyalty to the firm can be enhanced by the continuity of employee ownership, without the changes that are generally associated with new ownership.

ESOP for private companies Importance

Employee stock plans are expected to grow in popularity in the next few years, according to current patterns, but owners should consider their financial goals, succession timescale, and workers’ interest in ownership before making any decisions.

It is vital to speak with consultants who are familiar with the accounting, legal, and administrative challenges that are specific to ESOPs. Contact MUDS team at if you have any queries regarding creating an ESOP or the accounting or tax implications of ESOPs.

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May 2024