Truths about ESOP 101
After working in multiple fast growth startup’s and having been part of multiple buybacks as well as being in the startup ecosystem for a decade I want to put to bear my pov about creating wealth through ESOP.
Like any other randomised event, ESOP also follows Pareto principle which means a very small number of people within the company ever make sizable wealth that they elevate to the top 0.1% of the country.
The Pareto also applies with companies; significantly small minority of companies in India have employee friendly policies which enables an employee to create wealth.
Most startup’s have dark patterns within their esop policy which either locks you in for insufferable durations or forces you to pay exorbitant taxes to gain the right to exercise your esops when you are leaving the company.
Survivorship bias plays a huge role in enabling the narrative that esop is a great wealth generating tool leading to rude awakening for an employee after they join a company.
This doesn’t mean you can’t make wealth, it just means don’t get carried away by narratives and take preventable errors in your career.
Always talk to multiple people in startup’s and ask relevant questions to understand esop policies better.
Like everything else optimising only for esop for wealth creation will mostly not result in it.
If I leave company and I want to exercise my esops i.e. I want to retain them. Then I’ll have to pay as much as they cost or how is it? Also if there is a buyback event and I no longer work there - will I get to know and be able to sell them?
ESOPs are always granted at some strike price, once they get vested you can exercise the ESOPs i.e. buy the shares at earlier agreed strike price + you also have to pay some taxes which would be on your total gain i.e. (current_share_price - striker_price)total_units. So your total exercise cost (amount to be paid) would be strike_pricetotal_units + taxes
Ok and this gain or current share price is again determined by company regularly or how is it?
Any idea if I do exercise, can I sell them later in case of buyback? (IPO or other scenarios I think I can)
Please tag or state that this is applicable only for startups and not public companies ...
If you exercise the option, you are liable to pay taxes on such gains.. thats why most people do it only in case of buybacks..
Recently I came across this- https://www.hiive.com/
You can use this to trade your ESOPs, and you don't have to wait for IPO or ESOP buyback to liquidate your shares.
I haven't used this yet, so I don't know how legit this is.
I find this one extremely useful https://www.onlycfo.io/p/employee-stock-options-guide
Fast learning and fast paced growth aside, after 15 years of MNC experience I joined a startup to get some ESOPs.. and hopefully a good buyback ..
I have worked in 2 startups now.Both of these were already Unicorns when I joined .
W...
This post is for younger minds to not fall for ESOPs as a wealth creation tool.
Why do I say that?
ESOP pool is generally less than 10% of total equity distributed among thousand and ten thousands of employees. The share you get is mi...
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 ...
