Demystifying ESOPs: Founders’ Guide To Building ESOPs

In recent years, the employee stock option plan, or ESOP, has emerged as a widespread practice among big corporate houses and startups, especially during the Covid-19 pandemic. Essentially a kind of employee benefit/profit-sharing plan, ESOPs are often leveraged to ensure retention or reward, and further ensure tax benefits for companies and their owners.

As a startup founder, it is essential to understand the benefits and caveats of ESOPs to align them with the company’s financial and operational goals. Moreover, first-time entrepreneurs setting up new companies often allocate ESOPs to early employees to help build trust. They may also agree to join at lower salaries as ESOPs are likely to cement future gains. Even though the stake is relatively low, ownership in a company incentivises the workforce to work hard and stay loyal as the organisation’s success would create wealth for all. 

Understandably, ESOPs help reduce cash burn rates in bootstrapped or early-stage companies where capital is scarce. The same goes for growth-stage or mid-stage venture capital-backed companies as ESOPs ensure both long- and short-term benefits for all stakeholders within the ecosystem if a big sale happens or a funding or an M&A deal goes through. 

The concept of ESOP is not new, but few people have a deep understanding of how this financial instrument works. Even senior executives do not have thorough knowledge. However, those who have utilised the tool well (both companies and employees) are already reaping its benefits.

Some of the companies in India, which have reaped huge benefits from ESOPs, include Flipkart, Udaan, Grofers, Zerodha, FirstCry, BharatPe, Urban Company, Messho, Razorpay and Moglix while global giants like Amazon, Alibaba and Facebook have done the same. So, it makes sense to delve deep into the world of ESOPs in India.

Inc42 Plus has recently launched A Founders Guide To Building ESOPs to help startup founders get familiar with the concept of ESOPs and its impact. 

Curated by MyStartupEquity, the ESOPs guide will take readers through various clauses featured in policy and scheme documents besides detailing the ESOP process flow, narrating success stories and much more. The guide will also act as one’s ultimate go-to resource for formulating the ESOP policy and updating it at different stages.

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A Founders’ Guide To Building ESOPs: In A Nutshell 

• Answers frequently asked questions around the know-hows of ESOPs
• Gives a structured approach to understanding ESOPs
• Highlights the crucial terminologies for drafting an ESOP policy
• Throws light on various ESOP schemes, government acts and regulations 
• Decodes ESOP rollout, ESOP liquidity and ESOP taxation 
• Provides examples of exceptional ESOP policies followed by some of the Indian startups and more

Besides our latest guide titled A Founders’ Guide To Building ESOPS, Inc42 Plus also launched several startup-friendly guides in the past. Curated by industry experts, thought leaders and founders, these guides will help navigate the business to the next level. 

Some of the latest member-exclusive guides by Inc42 Plus include:

• Decoding Term Sheets For Early-Stage Startups 
• Building And Scaling A Digital Brand For Retail SMBs

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Note: We at Inc42 take our ethics very seriously. More information about it can be found here.