ESOPs are excellent financial tools for startups that are perennially low on cash reserves but want to reward their employees for all their hard work. While these have become a hot topic amongst start-ups given the hiring wars, these options have been around for ages.
Typically, companies would give these options to higher-level executives. But today, companies are pursuing wider ESOPs that are more inclusive and reward even junior resources and new talents. That’s to motivate their employees and give them the opportunity to participate in the good fortune of the company.
How else can an issue of ESOPs aid companies? Let’s find out by taking a look at some Indian and global start-ups that have used this method.
“Do you want to sell sugar water for the rest of your life, or do you want to come with me and change the world?” Steve Jobs is reported to have said that to Pepsi executive John Sculley to lure him to Apple. Offering a chance to get embedded into the very purpose of the company seems a great way to ensure employee engagement and ownership!
Considered one of the most innovative companies in the world, Apple had started offering its employees stock options a long time ago. The company allows its employees to purchase stocks at a discounted price and through payroll deduction so that it’s not taxed. When this stock is given to an employee, it’s used as an incentive for hard work or exemplary performance. Those who’re in higher-level executive positions would be able to receive such stock options as a part of their compensation package.
As Apple is a company that has been doing well steadily over the past few years, this is an extremely attractive option. A company as massive as Apple, Microsoft, or Google would be present in most elite stockholdings. It’s also easy to assume that Apple stock would do well, and will be a good addition to anyone’s portfolio. As of 2011, the company’s employees saw their shares grow to around $1,112,180. By 2015, the tech giants started offering their stocks to all their employees. These options empowered them to build for their future and keep employee morale high.
Publix Super Markets
With over a thousand stores and 2,25,000 employees, Publix Supermarket is among the biggest employee-owned company. It reported retail sales of over $44.9 billion, which is an 18% increase from 2019. That made the company the fifth-largest privately owned company in the US in 2019. The company is one of the most profitable supermarket chains in the country. It’s no coincidence that the company has a progressive ESOP strategy. All Publix workers receive company stock after being with the company for over a year, regardless of their position in the company.
That has created a whole family of very dedicated workers, which the chain can retain and build upon due to these options. No wonder, the brand has a reputation for having a deep dedication to customer service and community involvement.
In one of the most high-profile market debuts in a while, Zomato was able to create 18 dollar millionaires when they started offering shares. ESOPs were in focus throughout the journey of the startup and success stories abound. For instance, their chief financial officer had ESOPs worth Rs 114 crore when the market closed. The vesting period for Zomato’s ESOP programme is 4 years. Their allocation has been 5% in the first year, 15% in the second, 30% in the third year, and 50% in the fourth and final year. Zomato’s successful listing is a validation of ESOPs providing real value in the Indian context too.
While ESOPs seem like “notional” money, successes like this give people confidence that the stock will be liquid and it has real value. Employees also end up realizing how much their ESOPs are worth, as they can see the shares being traded transparently on the market.
Irrespective of temporary blips in stock performance Paytm is one of the most high-profile success stories in the context of India’s startups because of its disruptive technology that leads the world in digital payment innovation. The company recently gave new ESOPs to 166 employees, which they then converted into company shares. Before, they had over a million ESOPs, which were granted to mostly senior staff members. Based on the company’s last valuations, these converted ESOPs are worth over Rs. 182 crores. ESOPs have been used as a tool to retain and attract talent throughout. Over the past one and a half years, the demand for the same jumped with the companies’ valuations as a record amount of money is being pumped into the start-up economy.
This is a wonderful example of how ESOPs are seen as valuable resources. When a company consistently does well and their employees can convert their ESOPs, it’s a clear sign to other companies that this tool works. It also encourages other employees to opt for ESOPs, too.
India’s largest stockbroker, Zerodha, was able to create a different kind of ESOP plan. This new pool is worth Rs. 100 crores in total. The company is one of the few start-ups that hasn’t opted for outside investment. It doesn’t seem to have any plans of a public offering either. Instead, they rely on the company itself to be sustainable. Without external valuation, the company has self-assessed itself to have each share go at Rs. 1,400. That puts Zerodha’s value at $2 billion. A different kind of unicorn, but a unicorn nonetheless.
The potential buyback of their ESOPs is approximately Rs. 200 Crore. This new plan came into the picture after the company bought back Rs 65 crore worth of ESOPs at Rs. 700 a share. Zerodha is one of the few unicorns in this ecosystem that is also profitable.
These stories illustrate the immense potential that lies within this powerful tool. The message for startup founders is, if used the right way, you’ll be utilizing your resources the best way possible, maintaining employee morale, and creating a team of invested individuals all focused on creating a successful brand. There is a healthy and inspiring track record out there that proves the same.