In today's episode of Startup 101 series, we talk about what is employee stock option programme (ESOP), basic terminologies, how are they bought and sold and what are the advantages of ESOPs for startup founders and employees.

00:00 Introduction

00:20 What is employee stock options programme (ESOPs)?

Under the ESOP programme, any company or a startup allots a certain amount of shares to its employees and executives. These shares can be provided either at the time of joining or after a certain period of time like when they have completed certain milestones as decided by the company. These shares which are provided to the employees by the company are called employee stock options or ESOPs.

00:38 Why do startups give out ESOPs?

ESOPs are a great incentive to give to employees when a startup does not have a lot of funds to offer competitive salaries but want to hire top talents. This not only ensures that the employee receives compensation for his work but his compensation is also linked with the growth of the company now that they are a part-owner. Which means that the employees who own ESOPs will share the responsibilities along with the founders of the startup in order to help them grow the startup as the value of their shares is directly linked with the growth of the startup. This ensures that you only get employees that are actually serious about growing the business just like you. This is particularly handy for a bootstrapped startup which does not have enough funds to offer handsome salaries to its employees.

02:06 Understanding ESOP Terminologies

Grant Date: This is the date of the agreement when an employee is granted the option to buy shares. The original date of owning the shares might be a year from the date of the agreement but the grant date is the date when the employees are given the rights to own shares. So, even if the grant date is today, the option might only be available to the employees a year from today.

Vesting Period: Once the stocks are allotted to the employee, the companies put a certain limit as to how long they need to hold the shares before they are allowed to sell it. Which means that if you are allotted some ESOPs today but your vesting period is two years, then you won’t be able to sell any of the shares until the two years have passed. All these details are provided to the employee at the time of granting of ESOPs.

Exercising Stock Options: This is the time when the employee is allowed to exercise his stock option.

Sale of ESOPs: The sale of ESOP happens when the employee finally exercises the right and sells his shares back to the company to get back the monetary value.

03:50 Are ESOPs taxable?

Yes, ESOPs are taxable. But, the tax you have to pay might vary from country to country based on their own laws. In India, however, if you own ESOPs, you will have to pay tax twice. Once, when you exercise your right to ESOPs and actually buy the ESOPs and secondly when you sell the ESOPs. The amount of tax you have to pay depends on two things, how much you have gained from the share you sold and how long was your vesting period.

04:30 Confusing Aspects

Do you continue to hold the same number of shares till the time you are at the company?
Well, not really. A startup might start out by giving you 500 shares but as the startup grows and needs to raise more funds, it might end up splitting the shares. If the share splitting is done 1:10, then your 500 shares will be multiplied 10 times and you will now have 5000 shares. This only means that if you had 500 shares worth 1 lakh rupees, now you have 5000 shares worth 1 lakh. Your monetary value remains the same but the value of individual share decreases with respect to the share splitting ratio.
Now when the startup is raising funds, it ends up selling the shares to new investors to raise more capital. In this case, it might happen that you could end up selling your shares as well.

06:32 Advantages of ESOPs

Firstly, as we know, it hugely benefits bootstrapped startups to get employees even when they don’t have a lot of money to pay. This helps them save a lot of money during their early days which can be used on building their startup.

Second, it provides a certain sense of ownership to the employees and motivates them to work as hard as the founders. Since their compensation is tied to the company, the value of their compensation grows along with the company. Since most of the times a company doesn’t allot all the shares to the employee at once, they work hard to get more shares.

Music: Infraction - Corporate Business Music [ Ссылка ]

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