Why are startups opting for ESOPs?

Over the recent years, the Indian startup ecosystem has propelled itself into a robust and reliable segment of business. With a steadfast eye on innovation, several start-ups have achieved paramount success, thereby leading the overall economic growth with example.

This success of start-ups can be attributed to some of the best talents of the industry. Given this, It is a necessity for these start-ups to attract and retain the best talent in the industry. One of the key and rising points of interest for an employee is ESOPs which have the potential to play a vital role here, as a part of the compensation strategy.

Historically, ESOPs have been used as tools to incentivise senior management who have been with the business for years, however, recent trends are indicating that ESOPs are now being deployed actively as one of the hiring strategies to attract talent. It is becoming a necessity among the startups to incentivise employees early across different levels, as a part of their growth, reward, and retention strategy.

ESOPs help imbibe a sense of ownership among employees that acts as an incentive and leads to a motivated workforce. ESOPs also act as a retention-cum-cash conservation tool, keeping in mind that pay-outs under ESOPs generally happen after three to four years from the grant date. Employees in start-ups leverage early stage access to ESOP, with the intent to align their gains to the company’s growth. This acts as an added incentive to perform to the best of one’s ability for the startup.

Once vesting and exercise is completed, employees are given shares of the startup which can then be monetised when the company announces a liquidity event such as ESOP buyback or a cash acquisition or an IPO (Initial Public Offering). Given that most start-ups achieve decent valuation over an average grant period of 3-4 years, the cash pay-out on most of the occasions results in sizable income for the employees, thereby providing them attractive monetary windfalls.

In Summary, ESOPs as a part of hiring and retention strategy provides a competitive edge and helps create a motivated and energized workforce. ESOPs incubate a sense of pride in the employees through ownership and partnership in the company’s growth trajectory while adding to their own wealth pool.

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