How 35 Indian Start-ups Entered 100 Cr ESOP POOL
The year 2021 has turned out to be a magical year as more than 35 Indian start-ups have entered 100 Crore Employee Stock Option Plan ESOP POOL. In this article we have discussed their journey and how you can become one of those in future. ESOP or employee stock ownership plan is the secret of their success.
When an unprecedented $36 billion was invested in Indian startups in 2021, 35 non-founder senior management members had entered the Rs 100-crore stock options club, offering the opportunity for wealth accumulation that employee stock options enable.
According to top-tier entrepreneurs, the growing membership also implies that Esops have entered the mainstream in India and are more likely to become a much greater component of employees’ compensation packages sooner or later.
Employee Stock Option Plans (ESOPs) have recently gained prominence as a result of recent IPOs and investment booms in young enterprises. This has not only changed the dynamics of the Indian economy, but it has also resulted in affluent non-founder employees receiving large stock option payouts.
A Rs 100-crore stocks options club is now open to 35 non-founders.
Recently launched esop for private companies and privately held IT businesses in India have pushed 35 non-founder executives into the Rs 100 crore club of stock options, making them an elite group inside India’s fast growing digital economy. That is consistent with material supplied to ET by Longhouse Consulting, a government search and advisory business.
Esop for private companies: Giant Indian start-ups like Nykaa, Zomato, PolicyBazaar, and Paytm, as well as Flipkart Group, Byju’s, and Ola have entered into the 100Cr Crore. Longhouses predicts that the Rs 100 crore inventory options membership would have 100 members by the end of the year.
Stock options are becoming increasingly popular: The growing Rs 100-crore membership illustrates two things: that Esops may lead to genuine wealth creation, and that 2021 was the year they went mainstream in India’s startup environment.
Several companies, particularly in the previous 12-18 months, have executed important inventory potential buybacks. We disclosed last month that about 40 companies, including PhonePe, Razorpay, Udaan, Flipkart, UpGrad, Swiggy, and Spinny, had acquired back employee shares worth Rs 3,200 crore.
“Employees embrace the potential to create money as long as buyouts are real. Contrary to popular notion, if a company provides Esop buybacks rapidly, employees will promote and go, they will stay completely longer and will not sell their options soon.”
-told Harshil Mathur, cofounder and CEO of Razorpay, India
“Workers are beginning to understand that wage increases are insufficient to enable them to make significant changes in their lifestyles or achieve financial independence” he said, adding that such commitments should be formalised in writing, as should the terms under which shares may be granted during buybacks. Mathur emphasised the importance of Esops.
Flipkart generated India’s largest Esop pool, valued at Rs 17,000 crore.
Flipkart was one of the biggest profit generated (by employee stock ownership plan) company of India, it has created an esop pool of Rs 17,000 crore, propelling it to the top of the list of Indian online companies that have awarded stock options to its employees. It is utilised by Oyo, Zomato, Paytm, and Nykaa, according to information received by ET from government search agency Longhouse Consulting.
Twelve months of verification & Documentation Process: Esops in Indian startups have enjoyed a banner year, with more companies implementing buyback programmes and benefiting their employees.
- Flipkart’s Rs 600-crore buyback was one of the year’s largest.
- Meanwhile, after debuting in Indian marketplaces earlier this year, Zomato and Nykaa made a fortune for both consumers and staff. We recently disclosed that Zomato’s stock market debut resulted in the creation of 18 millionaires.
- ShareChat, a regional language social media network that became a unicorn in April, amassed an Esop pool of Rs 462 crore.
Employee stock ownership plan Path and Momentum Have Shifted
Employees have difficulties when it comes to Esops, regardless of the potential for financial gain. According to consultants, when exercising options, they include taxation points, rare liquidity programmes, and long-drawn vesting schedules.
According to Pallavi Nautiyal, regional head of Qapita, an equity administration platform, vesting durations are typically out of sync with the rate of business development, as organisations have gotten unicorns in months.
Thus according to Nautiyal, two major issues that workers face are repeat taxation (in the form of perquisite tax while exercising options) and capital advantageous assets tax upon liquidation. “When employees exercise their shares, they should instantly pay taxes on the notional beneficial assets,” said Abhishek Goyal, co-founder of the information portal Tracxn.
As a result of the large inflow of financing into these start-ups, the emphasis on employee stock option programmes has shifted. They are known for fostering a growth-oriented workplace and are excited about issuing ESOPs to its employees, which they have used as a tactic to recruit fresh talent on multiple occasions.
Esops for personal use Employee buybacks may also be undertaken by companies, resulting in a windfall for their employees. It allows employees to focus on their investments while knowing that the company is concerned not just with its own success but also with ensuring that the employee improves with them. It establishes a pool of wealth development for its employees, contributing to the company’s success while accumulating retirement savings that vastly outweigh the retirement plan options that the employee would otherwise have to implement. Razorpay, for example, repurchases at least once every year. Buybacks have also just begun at Udaan, UpGrad, Swiggy, and the Flipkart Group.
A wage boost isn’t the only thing an employee looks for in a promotion. A desired lifestyle needs innovative compensation arrangements, and ESOPs have gained in favour in recent years as a result. People no longer see a single source of income as a method of creating wealth. Their income and holdings must be diverse, as must their investing techniques. The possessions of these 35 people, according to the Longhouse Consulting company, speak to that, and we couldn’t agree more.
Businesses commonly utilise employee stock option programmes to compensate, retain, and attract employees. Employee stock option programmes aren’t meant to be retirement plans. Employee stock option plans, on the other hand, are contracts between a corporation and its employees that provide employees the right to acquire a specific number of the company’s shares at a set price over a set period of time. The grant or exercise price is another name for the fixed price. Employees who have been granted stock options anticipate earning money by exercising their options to acquire shares at the exercise price while the shares are trading at that price.
Procedure for Issue of Employee Stock Option Plan
Employee Stock Option Plans (ESOPs) are a type of employee benefit plan. It is given to employees by the firm in order to foster employee ownership in the company. Employees are given cheap stock options in the company. An ESOP can be issued by any corporation. Other than listed firms, all companies must issue it in compliance with the terms of the Companies Act of 2013 and the Companies (Share Capital and Debentures) Rules of 2014. In the case of publicly traded firms, they shall issue in conformity with the Employee Stock Option Scheme Guidelines of the Securities and Exchange Board of India.
Employee stock options are defined in Section 2(37) of the Companies Act, 2013 as the option granted to directors, employees, or officers of the company or its holding or subsidiary company to acquire, benefit, or subscribe for the firm’s shares at a preset price on a future date. Thus, an ESOP is a strategy in which a business offers to enhance its subscribed share capital by issuing additional shares at a fixed rate to its employees.
The ESOP helps both the corporation and its employees. It promotes startups by allowing employees to be rewarded once the firm goes public. If the qualifications are met, every employee of the firm can be issued an ESOP.
Who can avail the ESOPs
According to Rule 12(1) of the Companies (Share Capital and Debentures) Rules, 2014, ESOPs can be granted to the following employees:
- A company’s permanent employee who works in or outside of India.
- A company director, includes a full-time or part-time director but not an independent director.
- A permanent employee or director of a subsidiary company, holding company, or associate firm in India or beyond India.
A corporation cannot provide an ESOP to any of the following employees:
- an employee who is a member of the promoter group or a promoter of the company.
- A director who, directly or indirectly, owns more than 10% of the company’s outstanding equity shares, either personally or through a corporation or a family.
The above two restrictions, however, do not apply to Startup Companies for a period of 10 years from the date of establishment.
Let’s understand the ESOP Issuance Process
The approach for issuing ESOPs under the Rules is identical to the procedure for listed businesses under the Securities and Exchange Board of India Employee Stock Option Scheme Guidelines. A company’s procedures for granting ESOPs are as follows:
- Prepare an ESOP draft in compliance with the Companies Act of 2013 and the Rules.
- Prepare the notice for the board meeting, as well as the draught resolution to be voted on during the meeting.
- Send the board meeting notification to all directors at least seven days before the meeting.
- Pass a resolution authorising the issuance of shares by ESOP, decide the price of shares to be issued via ESOP, and set a time and date for the general meeting to pass a special resolution authorising the issuance of ESOP.
- Send the proposal to the board meeting to all directors within fifteen days after the meeting’s completion, and file the MGT-14 form with the Registrar of Companies within fifteen days of the board resolution being passed.
- Send notice of the general meeting to all of the company’s directors, auditors, shareholders, and secretarial auditors at least twenty-one days before the meeting date.
- In the general meeting, pass a special resolution authorising the issuing of shares under the ESOP to the company’s workers, directors, and officers.
- File the MGT-14 form, along with the papers, with the Registrar of Companies within thirty days after the special resolution being passed in the general meeting.
- Send options to the company’s workers, directors, and executives to purchase shares through an ESOP.
- Maintain a ‘Register of Employee Stock Options’ in Form No.SH-6 and record the details of the ESOP awarded to the company’s workers, directors, or officers.
- If an esop for private companies wishes to issue an ESOP, it must guarantee that the Articles of Association (AoA) allow for the issuing of shares through an ESOP. If the AoA does not authorise, the firm shall first convene an extraordinary general meeting to amend the AoA to incorporate the provisions for issuance of shares via ESOP, and then hold a board meeting to adopt the resolution and obtain shareholder approval for the ESOP Scheme.
ESOP allocation Process
There are three terms that are primarily concerned with the time of issuance of shares to employees via ESOP. These are their names:
- Grant: The term “grant” refers to the distribution of shares to employees. It entails telling the employee that he is a candidate for an ESOP. While giving employees the option of an ESOP, the corporation will have the discretion to decide the exercise price.
- Vest: The right of employees to apply for the shares that have been issued to them. For the ESOP plan, there must be a minimum of one year between the issuance of option and the vesting of option.
- The corporation will be allowed to choose the lock-in period for the shares issued (if any) once the option is exercised. Workers will be unable to receive dividends, invest, or reaping the perks of a shareholder in regard to the ESOP granted to him after the shares are issued upon implementation of his option.
Disclosures Required When Issuing an ESOP
- The following disclosures should be included by the corporation in the explanatory statement attached to the notice for approving the special resolution for the issue of ESOP-
- The total amount of stock options that will be issued,
- The workers who have been recognised as being eligible to participate in the ESOP.
- ESOP vesting period requirements,
- The maximum amount of time that options can be vested,
- The cost of exercise and the process of exercise,
- If there is a lock-in period,
- The provision of the greatest amount of alternatives to an employee,
- The methodology through which the corporation values its options,
- The criteria for the expiration of employee options,
- A declaration that the firm will follow the appropriate accounting rules.