Founders of many start-ups as well as established unlisted companies often ask us ‘if this is the right time for us to launch ESOPs?’ Or that ‘we are not listed - do ESOPs even make sense for us?’ Or that ‘we have just started out and most of the growth is in the future - should we do ESOPs now or later?’

In our interactions, we find some common apprehensions to launching of ESOPs such as:

  • We are too small
  
  • We are too young, we just started out
  
  • We are private and closely held
  • We are not listed  and not looking to get listed
  
  • Not sure if we should be diluting at this stage

All of these are valid concerns and there is no single right answer for all. Whether ESOPs are the right fit for your organization at the current stage in turn depends on the response to the following questions:

  • Are you expecting to grow significantly over the next few years (typically, 3 to 7 years)?
  
  • Are you looking to align the interests and make employees work for themselves whilst working for you?
  
  • Do you envisage any type of corporate transactions  which could potentially create an exit route for ESOPs?

If the answer to these questions is yes, then yes ESOPs do make sense for your organisation!

Please note that we do understand that the key apprehension often comes from the fact that the organisation is not listed and hence what can be the exit route for employees? It is important to note here that many corporate transactions such as strategic sale, funding or series of funding etc. act as potential exit route for ESOP holders. Not just that, if your organization over time becomes profitable and cash rich, cash-settlement or buy-back of ESOPs can also be undertaken.

Finally, whilst ESOPs are certainly doable for private companies, its even more important for them to get the ESOP quantum and terms right, so that the interests of shareholders and founders are protected whilst the employees get to participate in the up-side

Should you have any comments or thoughts or feedback, please feel free to share write to us. We would love to hear from you!

Vichitra Malhotra, FIAI

Founder and Consulting Actuary

v.malhotra@veritas-india.com

+91-9372876627

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