ESOP millionaires among startups are an exception

Exit options: One should be clear about how ESOPs can be monetised. Unlike the share of a listed company which can be traded, encashing an ESOP happens only when the company gets listed or when a merger or acquisition happens. Documentation: Ensure the grant document is executed in a formal manner.

It should capture all details related to an employee’s grant, right from the vesting period to monetisation of the grant in case of acquisition, IPO and even a shutdown.

Taxation: Returns earned from the ESOPs are taxable, which is currently 33%. Apart from the fineprint, self-awareness about one’s own risk appetite is also critical. Just like investing in the stock market, one needs to be mindful that this is a high-risk investment.

Startup executives becoming millionaires with their ESOPs is an exception and not a norm. It’s important to understand the vision of the partners and their value system. Startups which crop up, taking advantage of the valuation game, lose steam. It’s also important to understand what is one’s own financial objective behind joining a startup — if one is fine with deferred gratification, then one should not hesitate.

However, if one is looking at ESOPs as a means to fund prescheduled financial commitments, one should think twice. Though an exciting option, it is always prudent to walk in with one’s eyes wide open and be clear on possible outcomes — you win big, you lose big.

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This article was published in Economic Times Panache