As startups grow at an exponential rate, the crunch for top talent is hitting its peak. Founders can leverage Employee Stock Ownership Plans (ESOPs) to lay the foundation of a committed workforce. Cashing out ESOPs at regular intervals benefits both the founder and employees – as ESOPs go from being just paper money to real wealth.
Here are some ways in which ESOPs can be cashed out:
Buyback is a technique in which companies purchase their ESOPs from existing shareholders (usually at a price higher than the Fair Market Value). In doing so, companies can increase the proportion of shares that the company controls, give returns to employees, and restructure the ESOP pool if needed. The ESOP pool is thus replenished and can be used to hire more talent or incentivize outperformers.
For instance, Bangalore-based online freight aggregator BlackBuck issued the buyback of some ESOP shares from employees. 35 employees sold back their stock options at a price much higher than the FMV, reportedly at 11x. The company’s senior HR representative mentioned in a public release that BlackBuck bought back the shares to restructure its ESOP pool.
Liquidity via secondary transactions
After exercising ESOPs, employees do not have to wait for an IPO to sell their shares. They may choose to sell the shares to third-party investors (individuals or VCs). Such transactions have usually seen an existing investor or a new investor with a relationship with the company getting access to the secondary allocation.
In June 2019, the Canada Pension Plan Investment Board (CPPIB) bought an 8% stake (worth $150 M) in Delhivery, the Gurgaon-based e-commerce logistics unicorn. This created a window wherein Delhivery’s ESOP-privileged employees could liquidate their shares in a secondary transaction. Some of the employees were able to sell their shares and find an exit, making substantial monetary gains.
IPO (Initial Public Offering)
When a company lists on the exchanges post its Initial Public Offering or IPO, all the stocks of the company are opened to the public for trade. Typically, employees would have converted their ESOPs to shares at a lower cost price (exercise price), and therefore when the company lists (usually at a much higher price), they are able to make significant gains.
IndiaMART, India’s largest online B2B marketplace for business products and services, announced an IPO of 4.89 million equity shares at a face value of INR 10 each, on June 24, 2019. The IPO ran for 3 days and the issue price of each share was between INR 970 and INR 973. 10,000 shares were reserved for employees at a discount of INR 97 per share. The IndiaMART stock shot up 40% on listing and today the stock is trading above INR 2000 per share.
To learn more about ESOPs you can read our other blog on the strategy to create a strong ESOP Policy
If you are looking for an easy to use tool to create your ESOP policy and manage ESOPs for your team, check out MyStartupEquity
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