Earlier this month, Walmart bought a majority in Flipkart. At the same time, the e-commerce website announced a 100% buyback of the vested stock options of its employees. This, no doubt, made the employees euphoric. Many of them have reportedly become millionaires. Today, ESOPs are a key value driver to joining a startup versus a big company, since a start-up ESOP can appreciate rapidly, as Flipkart has shown.
How ESOPs Help
ESOPs – or Employee Stock Option Plans – are a great way for companies to create value, not just for themselves but also for employees. Through micro-transfers of the ownership, companies give their employees a direct incentive to work towards business growth. The employee’s reward is higher compensation through the appreciation of their ESOPs as well as a chance to earn further stock grants for high performance. Not just that, an appreciating stock attracts more talent to a company’s workforce.
What We Did At BankBazaar
At BankBazaar, too, we believe in the rewarding our high-performing talent with stock options, making them participants in and beneficiaries of our growth story. Not just that, we’ve managed to provide two secondary exits worth $7 million to our employees during our Series B and C.
When To Exit
As an employee with stock options, it’s often difficult to know what the right time is to exit your options. It’s also not easy to exit ESOPs since it’s difficult to find buyers except when there’s a buyout or fresh rounds of investment. As a stock holder in your company, you can show confidence in the company’s long term vision by remaining invested. On the other hand, if an opportunity to exit comes and you use it, it’s also important to use your new-found riches in a manner that helps you keep growing financially – like using the money to set up a new business, buying a home, paying off your debts, or making a Mutual Fund investment. ESOPs are a fantastic asset building security and help you build a long-term nest egg, such as buying a house without having to depend on your salary to pay for it.
Use ESOP Liquidity Smartly
Companies can leverage their ESOP liquidity in two ways. One is partially selling the liquidity – i.e., the ESOPs that have vested. For example, the investor buys a portion of the employee’s vested stocks – let’s say, 10-20%. The second is a 100% buyout of vested stocks, which happened in Flipkart’s case. Our advice, as a company that has been through multiple rounds of investments, is that a company should make use of its partial liquidity of ESOPs. It allows fresh investments to come into the company, and the stock also appreciates with each round of funding.
Don’t Forget Taxes
Since ESOPs are market linked by their very nature, you can choose to shift the investments into safer debt based instruments at this point depending on your risk appetite. Keep in mind however, that ESOPs are taxable as perquisites (salary income). If and when you choose to exercise your options, budget for the tax that you need to pay on the difference between the exercise price and the fair market value of the stock. Likewise, do note the capital gains that are also taxable when you sell your shares.
The writer is CEO, BankBazaar.com.