ESOP buybacks have come as a succour in times of the pandemic. Employee stock ownership plan (ESOPs) buybacks besides incentivise financially also induce employees to “have their skin in the game.” This also helps attract potential assets to startups.
ESOP buybacks are offered to improve pay packages thereby ensuring a higher employee retention rate, which is the biggest challenge faced by many startups.
Primarily, employees choose ESOPs in a startup because it shows them a dream to be a bigger part of the success of the company. Founders and investors share the wealth created by startups with employees through ESOPs. Such buybacks often signal goodwill and positivity as they invigorate the faith of employees in stock options.
Under an ESOP buyback, employees holding vested ESOPs are eligible to sell their ESOPs to their company or employer. Startup companies may choose to buy back the ESOPs at a premium under specific instances.
Speaking to Inc42, Nithin Kamath, founder & CEO, Zerodha said, “The main reason for the success of our business has been the team — people who have given their everything and more. We thought this was the right time to provide liquidity — us completing 10 years of Zerodha, and because the economy is going through turbulent times. We believe that businesses that are lucky to do well in the current situation, should do everything in their capacity to help put liquidity back into the economy through buybacks, hiring more people, not holding back salaries, etc. This is the need of the hour.”
The buybacks will also allow employees who have left the organisation to participate and sell anywhere between 25% to a full 100% of their ESOPs to the company. Tina Balachandran, VP, HR at Unacademy, talked about the development in the Unicorn via a tweet.
At @unacademy we celebrate the hard work and passion of Unacademians everyday. I am elated to share we have announced another ESOPs Buyback round for all eligible employees. This is our way of paying it forward to every Unacademian.
— Tina Balachandran (@TinaBalachandr1) October 15, 2020
“While ESOPs are a way for employees to become co-owners and shareholders of the company, ESOP liquidity is a demonstration of the commitment of value creation for employees. It allows them to monetise their investment even though the company may not be trading publicly yet. For organizations, ESOPs may be a significant part of compensation especially at senior levels and liquidity events provide an avenue for people to monetise a small portion of their vested options to take care of certain cash flow requirements. A competitive pay package coupled with the opportunity to be part of the organisation’s growth story is an exciting proposition for many. This, in turn, positively impacts employee retention rate,” Dinesh Ramamurthi, chief human resources officer, OYO told Inc42.
Uncertain times require immediate and proactive measures. With the ongoing Covid-19 pandemic and reduced cash flow, several companies have been relying on ESOPs to compensate employees for salary deductions. However, employees should be careful in understanding the value of its stock options and also look at the terms and conditions offered by the company.
For example, foodtech unicorn Zomato, which recently laid off hundreds of employees, is letting employees vest their ESOPs. Hotel and hospitality unicorn OYO has allotted ESOPs worth $20 Mn to former and existing staff members. Meanwhile, digital payments unicorn Paytm takes the ESOPs route every year to reward high-performing employees and new hires.
For listed companies, the employee can sell the shares in the open market when their lockin period of ESOP is over on the prevailing market price. Whereas for an unlisted company, employees can sell ESOPs to the employer or other employees only.
However, while India’s ESOPs taxation remains ineffective, many of the global startup employees having exercised ESOPs have found themselves caught completely off-guard.
Meanwhile, there are several issues when it comes to buybacks. Taxes aside, the issues with ESOPs in Indian startups is that once exercised, employees have no opportunity to liquidate their shares but to wait for either IPO or the company’s cashback offers.
Recently, Commerce and Industry minister Piyush Goyal urged startups to draw up a holistic report on issues related to ESOPs (employee stock option plans) so that it can be sent to the ministry of finance for consultations. The government has recently allowed startups to issue ESOPs to employees for up to 10 years from their registration year. Earlier, the limit to issue these shares was till five years.
Internationally, Singapore offers a dedicated equity remuneration incentive scheme (ERIS) for startups which provides a tax incentive to employees who derive gains from ESOP granted by their employers.
According to the scheme, one can enjoy tax exemption of 75% of the gains arising from ESOPs. Tax exemption is available for each year of assessment over a period of ten years, subject to qualifying criteria. The cumulative gains on which the tax exemption applies are capped at $10 Mn over the ten-year period and the gains must be derived on or before December 31, 2023, according to the Inland Revenue Authority of Singapore.
The US has a multi-layered tax structure with the federal tax structure at the top of the hierarchy.
Here is the list of startups issuing ESOPs buybacks:
Unacademy: Bengaluru-based Indian edtech platform Unacademy will undertake an ESOPs (employee stock ownership plan) buyback programme worth INR 25-30 Cr in December this year. The buyback, scheduled for December 10, 2020, will also allow exited employees to participate and sell anywhere between 25% to a full 100% of their ESOPs to the company. Founded in 2015 by Gaurav Munjal, Hemesh Singh, Roman Saini and Sachin Gupta, Unacademy claims to have 30 Mn registered users and around 3,50,000 paying subscribers.
Zerodha: Stock trading platform Zerodha has claimed a unicorn valuation in its latest employee stock ownership plan (ESOP) buyback offer. The investment platform claims it will spend INR 60 Cr to INR 65 Cr to buy back ESOPs from senior management and long-term staffers and offer liquidity options in its 10th year. Bengaluru-based Zerodha was founded in 2010 by Nithin and Nikhil Kamath and offers stockbroking services.
FirstCry– FirstCry has claimed to buy back 13,09,860 equity shares each at a price of INR 234.8 per share for an aggregate of INR 31 Cr. Founded by Supam Maheshwari in 2012, FirstCry has raised about $425 Mn in total risk capital. Besides SoftBank, its previous backers include Chiratae, SAIF Partners, Adveq and Vertex Ventures.
BharatPe– Merchant-focused payments and lending platform BharatPe created an ESOP pool of around $20 Mn. The Delhi-based startup will reportedly allow employees to vest 25 percent of their pool after completion of the first year and 75% post that over the next three years. They gave the option to employees to sell shares from their first vesting back to BharatPe. It was founded by Ashneer Grover and Shashvat Nakrani in 2018.
Urban Company– Urban Company has facilitated an ESOP repurchase worth INR 37 Cr at INR 1.10 Lakh per share. Founded in 2014 by Abhiraj Bhal, Raghav Chandra, and Varun Khaitan, Urban Company offers home services such as beauty, cleaning, handiwork, appliance repairs, plumbing and more.
MPL–Gaming startup Mobile Premier League has facilitated an ESOP buyback worth $3.2 Mn. Founded by Srinivas and Shubham Malhotra, MPL is a gaming platform that offers more than 70 real money games, including fantasy sports, rummy, poker, chess, 3D pool, ludo, and carrom.
CarDekho– CarDekho plans to buy back ESOPs worth Rs 25 Cr. Founded in 2008, CarDekho’s online platform provides all sorts of information related to cars. Besides CardDekho, the Girnar Software group currently operates in various leading Indian auto sites such as Gaadi.com, ZigWheels.com, BikeDekho.com, InsuranceDekho.com, PowerDrift.com and more.
Meesho– Meesho had provided ESOP buyback worth INR 7 Cr. Founded in 2015 by IIT graduates Barnwal and Vidit Aatrey, Meesho is an online reseller network comprised of individuals, and small and medium businesses (SMB). The sellers can sell their products network of contacts and followers on social media platforms such as WhatsApp, Facebook and Instagram. The company has around 820 employees.