Bangalore: When Raman Roy was setting up Spectramind in 2000-2001, he offered share ownership to 500 staff members. When Wipro bought out Spectramind, everyone made the equivalent of at least a year’s salary on their ESOP plans.

Employee Stock Option Plan (ESOP) is becoming an integral part of every startup that is striving for survival. Companies are offering this benefit not just to top-paid executives but also to the new entrants. The reasons to offer stock options might vary from company to company. It may  be to retain good employees, letting their employees feel like owners or partners in the business, or to hire skilled workers by offering compensation that goes beyond a salary, and these cases are especially true in startup companies that want to hold on to as much cash as possible. But, will opting for ESOP make the employees rich? Will they get benefited anyhow?

Bonus, which is a percentage of revenue or profit, is an alternative for ESOP. However, in ESOP, the benefit is that team members sacrifice their current monetary benefits and build the value for future, and this is what the startup needs at the initial phase for survival. We have seen many startups closing down not because they did not have a good product or idea, but because they did not have the funds to make it big.

However, with the subsequent increasing valuation of the company during the funding rounds and more equity vests in to the hands of the investors, thereby the value of each share goes down leaving a very low and substantial amount of fund to be distributed among the employees. Today we see more exits in the form of M&As rather than IPOs, it is quite relevant that the valuation will be made early and the return that employees are going to get, if the company would have gone for IPO, is quite less.

For the employees who opt for ESOPs as an additional benefit apart from the salary, they do not lose out on their salary if the valuation is not good. It is only those who exercised their options and held on to it in anticipation of prices going up, who will lose in such a deal. ESOP is not meant for an employee who frequently jump jobs, one can reap the benefit if he stays in the company for a 4-5 year period. If the company is acquired and the shares held for more than one year are sold, it is termed as long-term capital gain, and such gains are exempted from tax. However, if the shares were held for less than one year, they would be treated as short-term capital gains and would be taxed accordingly.

Owning a part of the company one works in would be one of the best dreams and might entice him to join the startup, but as the company grows big, his part of benefit keeps on decreasing. Imagine having shares in a company which you cannot sell and the value of which is crashing all around you. It is scary. And then there are cases about shares that you already own but cannot sell because it has a lock in. Also, as a result of the economic slowdown, several companies have postponed its IPO indefinitely and are on the verge of being acquired. So, it is time to think whether to stay in such company to reap a minimal amount of benefit or leave the ship and board on a better on.