How exactly does an ESOP buyback work?

I am at a VC backed early stage startup. Have been offered Esops.l but have no clue on this. Can somebody explain to me how can I make money from ESOP by answering these- 1) Do I have to buy them post vesting period? If yes, what amount do I need to pay? Also will there be text on this purchase itself? 2)) When the company buys back from me assuming my vesting was over and I could hold them on, what's the amount I will get? I am assuming it's (no of options * current share price) - (no of options * strike price issued to me). Is that correct? If yes, how is the current share price calculated for non listed company? 3) Now when the company buys these, what's the tax I have to pay? I am trying to understand if availing options and selling options are different and if both have taxes 4) What happens in IPO? Who buys from me? Where can I sell? What price do I sell at?

Karilyn Everett

Startup

a year ago

(1) Yes. This will typically be exercise price * no. of options. You are exercising your rights to convert your options into shares of the company. (2) Yes, that's mostly it. Current share price is calculated by fair market valuation of the company. For non-listed companies, this would either be generally available in your Carta/Equitylist dashboard or the company will share this number with you at the time of the buyback. You could reach out to your finance/HR/equity team to understand this number before the buyback. (3) Yes and yes. There's perquisite income tax when you exercise the options and there's capital gain tax on selling the shares in a buyback/public market. (4) In most cases, there's a buyback before an IPO. The company will list the shares at a higher price than your share price. In case that doesn't happen, you are a public equity holder post the IPO and your share price can increase/decrease as the market moves.

Jordon Carmden

Startup

a year ago

Another important thing to note is the exercise window. You can't hold the options forever after your employment ends. You usually have a 5 year to 10 year exercise window after the employment period is over. Many startups have a 60 day window though - typically enforced by greedy VCs to snatch back the equity.

Anise Nadeen

Stealth

a year ago

Thanks this is super helpful!

Kendall Denver

Stealth

a year ago

Following

Dezi Lee

Mentor/Advisor

a year ago

@SubtleRed Great questions. A few others in your co will also have these queries. I would recommend that you ask these in your co to the relevant folks. - you will get clarity - your colleagues will get clarity (they will be in same situation) - sr mgt will be able to share better/ they may also learn in that process. - you can post the replies here for the community at large.