An authored article of Rituparna Chakraborty in Economic Times Wealth talks about what things employees should keep in mind while opting for a compensation package with the ESOP component.
ESOP is the Brahmastra in most employers’ arsenal to attract and retain talent. While in India, it was brought into vogue by IT legends a couple of decades back, more recently it has been revived with vengeance by startups, where it helps to attract talent and also eases the monthly cash flow in the name of compensation during the initial bootstrap days.
Some of the things that a startup employee needs to take into account before accepting ESOPs are:
Vesting period or lock-in period: ESOP is an option which calls for certain pre-determined terms and conditions to be followed to receive the privilege. One of them is a vesting period. In India, the average vesting period is four years and you will be eligible to receive the prescribed stock option only after the vesting period. Exiting the company before this usually will result in losing the option.
Target-linked: Many startups have added an eligibility clause: one should have not only completed a stipulated number of years to acquire the ESOP, but also achieved the agreed-upon targets.
Exit options: One should be clear about how ESOPs can be monetised. Unlike the share of a listed company which can be traded, encashing an ESOP happens only when the company gets listed or when a merger or acquisition happens. Documentation: Ensure the grant document is executed in a formal manner.
It should capture all details related to an employee’s grant, right from the vesting period to monetisation of the grant in case of acquisition, IPO and even a shutdown.
Taxation: Returns earned from the ESOPs are taxable, which is currently 33%. Apart from the fineprint, self-awareness about one’s own risk appetite is also critical. Just like investing in the stock market, one needs to be mindful that this is a high-risk investment.
Startup executives becoming millionaires with their ESOPs is an exception and not a norm. It’s important to understand the vision of the partners and their value system. Startups which crop up, taking advantage of the valuation game, lose steam. It’s also important to understand what is one’s own financial objective behind joining a startup — if one is fine with deferred gratification, then one should not hesitate.
However, if one is looking at ESOPs as a means to fund prescheduled financial commitments, one should think twice. Though an exciting option, it is always prudent to walk in with one’s eyes wide open and be clear on possible outcomes — you win big, you lose big.
This article was published in Economic Times Panache: https://goo.gl/RPBxs5