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ESOP for Startups

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  • ESOP for Startups

    What is the basic math behind ESOP? Is stock options worth if the startup has already raised seed fund? Do they really compensate for the cut in the salary? Real life examples will be really appreciated.

  • #2
    Hi Mrinalini,
    For all the reasons given in other answers, ESOP is high risk high reward in any part of the world. In India, there's the additional angle of Fringe Benefit Tax, which is payable at the time of applying to buy the shares, not after you receive it and sell it at said profit. This can prove tricky at times. To cite an example, if vesting price is INR 500 and the market price on the day of vesting is INR 600. Say ESOP holder has 1000 shares that she can buy. At the time of applying for them, she has to pay two amounts to the company:
    1.1000 x INR 500 = INR 500K for the shares, which is obvious.
    2. Tax Rate x 1000 x INR (600 - 500) as Fringe Benefit Tax. Company takes some time (could be 10 - 15 days) to transfer the shares to ESOP holder. By the time the share price may have fallen from INR 500, still FBT paid on higher amount is lost forever.
    Overall, from the employee point of view, ESOP is a good form of bonus over and above compensation.

    Sunny Christ


    • #3
      Thank you Sunny Christ for your information. Do you have any idea about how an employer is beneficial with ESOP ?


      • #4
        Hi Mrinalini Reddy,

        Yes, I have some points to say about the benefits and disadvantages for an employer with ESOP and here are some
        Benefits to Employer
        • Hire good talent
        Start-up companies use ESOP to hire good talent, as they cannot afford to pay very high salaries
        • Ownership feeling
        The employees have the feeling that they are partner in Company and are motivated to work harder as companies growth is linked to their growth

        Disadvantages to Employer
        • Dilution
        When the ESOPs are exercised the founder’s shareholding gets diluted.

        Sunny Christ


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