Wealth Creation with Employee Stock Ownership Plan (ESOP) – Benefit and its XYZ

Credit – Investopedia

Say you graduate from one of the top IITs and then do a master’s from one of the best IIMs in the country and are able to get yourself one of the top 100 placement offers Still, you would make only around 35-40 LPA and due to all those loans and EMIs, even with an exceptional career growth, it will require you a decade to make yourself 10 crores in net-worth. 

So to make exceptional wealth a Job is definitely not the right option. But Startup Jobs have consistently broken that belief. A lot of employees at startups, especially those who joined the startup in its early stage have made a significant amount of wealth for themselves. And they have made this kind of wealth through ESOPs.

Let’s understand what are ESOPs and how ESOP buyback works, but before that see these figures-

All these figures and data show that ESOPs really did wonders for startup employees.

What are ESOPs?

ESOPs are Employee Stock Options, issued by a company to its employees as appreciation in return for the work they do and the value they create. Generally, ESOPs are vested over years which means an employee receives ESOPs only after he has completed the vesting period specified in the contract, it can last from anywhere between 2-5 years.

ESOPs are just like the shares that any other investors hold. You get all the financial and voting rights in the company. (majorly depends on draft or say, board)

Why such benefits?

Startup is not a very safe space to work in, not literally but it is about job security. Unlike a corporate job, the security is way less, a startup could shut down at any time due to a fund crunch or any mishap, maybe new regulation, or just because a new competitor acquired the market. In such a risky situation when an employee takes a leap of faith in the startup, the startup rewards the employee in return. The startup allocates a small proportion of its stocks to the ESOP pool and distributes it to employees according to the value they put in and the performance they showcase. 

Here at Pepcorns we too have Stock option benefits, if you believe you are the best of your world and believe in a free and fair market then reach us at career@pepcorns.com.

How does an employee receive the benefits of ESOPs?

There are three ways: Buyback by the startup, Acquisition or merger, and public listing.

A buyback is when the startup buys the ESOPs back from the employees, this is usually done at the market price. In case of an acquisition or merger, the ESOPs are converted to the shares of the new company or bought by any new investor who wants to hold a stake in the new company.

Public Listing is the way most of the ESOPs are liquidated, The ESOPs are usually a pool of the stocks liquidated during the IPO, or sometimes the ESOPs are converted to shares and then one can sell them in the public market.

While it might require you to take up a job at a startup to get ESOPs, you can get CSOPs, investment instruments for startups, which are as lucrative as ESOPs financially. Sign up on Pepcorns if not already and get started with building your next-gen portfolio.