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[The Outline By Inc42 Plus] Keeping Up With Startup ESOPs

[The Outline By Inc42 Plus] Keeping Up With Startup ESOPs

The pandemic pushed startups to focus on ESOP liquidity - is it enough to fix the image of ESOPs?

In an ecosystem, where big exits are scarce and billion-dollar companies struggle to make profits — it’s a big ask from employees to accept ESOPs instead of cash bonuses. Making things worse are the cautionary tales around ESOP. 

Here’s a famous one that involved a serial entrepreneur and a celebrated name from the startup ecosystem. 

Alok Goel, who recently quit venture capital firm SAIF Partners (now Elevation Capital) to start his own venture, was promised a lucrative ESOP deal in return for a drop in pay when joining redBus in 2012 from Google. The promised deal would allow employees to vest 20% of their ESOPs in two years, 30% after three years, and 40% after four years of working with the company. But, something unexpected happened — less than a year later in 2013, redBus cofounder Phanindra Sama decided to sell the company to travel giant Ibibo, which meant Goel lost out on the promised ESOP benefits. 

Obviously, people were not happy and till date, the story of redBus is quoted by employees whenever employers ask them to compromise on the in-hand salary in lieu of ESOPs. Those who deride ESOPs feel it’s nothing more than a promise that rarely materialises. After all, one can’t pay the rent or expenses using company stocks — the common argument goes. So it’s not enough for employers to simply offer ESOPs without also showing the potential liquidity options in the future. Along with this, the nature of ESOPs itself is changing as the startup ecosystem has matured. 

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