Wealth Creation through ESOPS
What is the probability of generating significant wealth (1-5Cr) by working at startups(Both US headquartered and India headquartered) in India? Is Generating wealth through ESOPS normal thing in India or very few lucky ones make such money? Do you know guys who have made significant money by working at startups? If yes, what parameters one should look for while identifying such startups?
Ideally if you join a startup, you’re betting on the idea, vision and are really hoping that you end up creating wealth via esops, because that’s the only thing that is uncapped (in terms of growth).
Few startups which’ve done really well on this front are freshworks (lots of early employees bought fancy cars and houses), Razorpay (through regular buybacks), Acko, Porter.
I don’t know about how early employees at Paytm, Nykaa and Zomato did post ipo.
Definitely know people who have made excellent outcomes from being involved in the early days of unicorns.
There are enough people from teams like Flipkart, Zomato (going down to the first 20-30 people here) that are easily worth multiple crores.
I don’t feel, however, any of them could have predicted this. And its really tough to figure out how to find yourself at an early team that will lead to this (after all, even top investors end up with enough dead portfolio despite all DD)
Looking at quality of team, how thoughtful the founders are, how differentiated the approach is - can be some of the ways to increase probability
Ultimately, I feel the best shot is to stick to the early stage world, brace through the ups and downs, and end up with one such startup.
So what is risk reward like for joining a early stage startup (till series A) vs medium and late stage startup?
You can ask for more esops when they series A. But it comes with the risk of your esops being just paper due to the company failing, which is true for most startups
randombug
Stealth
2 years ago
The probability of wealth creation via esops is very low. Mostly startups fail and esops become worthless. In scenario where and "when" esops have significant value, the early employee's compensation will be significant enough in first place that it will be extra cherry on the cake and not the only source of wealth creation.
Indusplateau
Stealth
2 years ago
Pareto principle
20% of folks will make 80% of the returns. Not everyone is so lucky.
Less than 1% people who get ESOPs make money through them. You getting liquidity has a probability, success of startup is a probability, then there are tax implications, so consider it a lottery ticket. If you get it, great, but if you don't, shouldn't compromise on your basic pay for it
But risk reward ratio would be different for starups in different stage (early stage vs medium-late stage starups). What is your opinion on this?
If you are risking a part of your main pay, then it's a risk, if you get your ESOPs as a probable bonus, there is no risk, maybe reward
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Investor3823
Student
2 years ago
Honest opinion. It depends a lot of what’s the stage of funding the company is in , who are the investors etc etc . The later you join the party the quantum of wealth creation reduces . Plus it also depends on the economic cycle . Like till last year when everything was good and valuation game was sexy , there was huge wealth creation . But this year suddenly lot of ESOPs have become meaningless
Very low probability, and wealth creation can be mostly attributed to luck. Also, takes a long time in most cases.
Team and business model are the most critical aspects.
Consider this, VC and investor community get tremendous success in only 1-2% of their investments, after 7-10 years, and it is their day-in-day-out job to find future diamonds.
1Cr through RSU is pretty doable even at big public tech over 2-4 years if the stock market moves decently (read: not crash absolutely)
So startups should ideally have SBC structured to beat that but it's tough because of the uncertain buybacks and ipo.
Agree. Microsoft stock gave good upmove in last 8-9 years. Which Sector (e.g. Cloud Infra/Saas) or Public Tech firms would you bet on for giving good Stock returns in this decade?
I think clean tech has a good runway in the next 5-8 years. The short term will be bumpy due to the general macroeconomic environment but business economics is pretty good for clean tech right now and will only get better over the next decade, so pretty strong fundamentally.
Check out $ENPH top line and bottom line growth in the last 3-4 years and the runaway is pretty solid, so the stock price will eventually go higher. Good to get in such places and lock in at lower valuations.
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Generating a 1-5cr is a very very low probability. Unless you are one of the first 10-20 employees or a CXO, you will probably have a 0.1% share at best at Series A. Assuming a buy-back scenario at Series C, that share will have gone down to ~0.06%. You might be able to tender half your ESOPs at best. 3cr for a 0.03% stake would imply a valuation of 10000cr, a unicorn. Many things have to go right for this to pan out.
Get in early on a rocketship and/or (more importantly in my view) figure out folks you will enjoy working with. Hopefully it will work out. At the very least you will have learned things and enjoyed the journey.
Here are my 2 cents:
Look at the industry first - is it growing at 15-20% CAGR or 3-4%. An average team in a high growth industry can do quite well even with an average team. In a low growth rate situation, even a world class team will have a hard time.
Second, look at good business models - not a mega cash burn business. Some cash burn is fine - You should do your research here. You can buy financial statements of start ups online for a few 100 bucks easily.
Check founders - what's the vision like, passion for the space, ambition, demanding excellence, cares about people and values.
If you can find these three - you significantly cut down on luck as a factor. You don't need to time your entry into the company at seed or series A times. With these three things, you'll have a company that lasts years and where you can work for years and grow. Even at Series C, you can negotiate great equity and make a few Crs. You should be willing to spend time in the company, however.
Yes but the question is at what cost? Depends on how much you are hungry for a few extra crores and at what cost or tradeoffs? From my personal experience, trading the best years of your life for a few extra bucks in disposable income is a terrible decision and only leads to regrets in your 30s. Please note that I am talking about the surplus post your needs.
1) Contacts and experience of the founder, has the founder been successful in some domain, does he have marketing/sales people to make people buy his product
2) Is the company making a meaningful product? If it's a B2C and you don't find it worth using the product, ditch the company. If it's B2B, contacts of sales people in the company really matters.
3) High quality people in the top management and decent quality employees.
Know about early employees of ShareChat who have made upwards of 10Cr during their buyback which happened on 2021. Even entry level joiners(Content Ops) had made upwards of 50 lakhs(maybe more also).
I think it’s best to join a startup which is generating good amount of revenue even during their pre-series, Series A level. Lot of growth startups fail to pivot to a profitable business.
dukhdardpeeda
Stealth
2 years ago
It's good to read insights over here!
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