How ESOP Startups Are Drastically Increased in India?

Employee stock ownership plans (ESOPs), which were used to use to tie upper leadership to company goals and make their pay competitive, are now being given out to employees across the board by some esop startups — particularly those in sectors where business and revenue reached new highs despite the pandemic.

A number of esop startups, including PhonePe, Licious, ShareChat, and Wakefit, have recently given ESOPs to all of their employees, including back-office, administrative, production, and on-the-ground sales staff, as a gesture of sharing their success and retaining talent.

According to experts, liquidity events or cash-out opportunities have increased the value of ESOPs in real cash terms in recent years, prompting an increasing number of esop startups to use it as a tool to attract and retain talent.

PhonePe, an internet banking company, recently announced a $200 million (Rs 1,460 crore) stock option plan for all of its 2,200 employees, allowing everyone in the company to benefit from its accomplishment in a year in which payment systems have exploded.

"So each solitary PhonePe employee has made a significant contribution to generating profit for the firm, even if they're computer programmers, product designers, customer service agents, or on-the-ground sales agents, so it's only fair that everyone benefits," says the CEO.  said Manmeet Sandhu, the company's chief people officer.

"For most roles, our compensation system aligns with this approach by eliminating variable pay based on individual performance." Rather, we are using ESOPs to incentivize everyone to invest in the long-term success of the company. We enable each employee in the organisation to participate in the wealth generation possibility they essentially created by having ESOPs at least $5,000 for all levels," she said.

ESOP Startup in India is Surprisingly Increased!

Licious, a Bangalore meat and fish company, announced its first employee stock ownership plan in January, which will benefit over 800 employees from various departments, including processing centre workers, delivery boys, and corporate employees.

"Our meat technicians, meat processors, and delivery heroes are the lifeblood of this company, and they deserve to share in its success." "The ESOP grant to our blue-collar workforce is a progressive and positive step in the right direction," said Abhay Hanjura, one of the company's co-founders.

All of Wakefit.co's employees, including back-office production staff, have been given ESOPs. "New employees played an extremely critical function in our financial growth and development up to this point. They span functions and seniority levels, ranging from highly experienced professionals to recent graduates. As a result, we decided that rewarding these dedicated team members, regardless of function or seniority, is fair," said Chaitanya Ramalingegowda, the company's co-founder.

ShareChat, an Indian social media company, announced plans in September to offer ESOPs to all employees on its payroll, including administrative staff.

According to experts, ESOPs as a strategy to motivate employees in India has lagged behind the US, where most esop startups offer them across the board. It is mostly offered to senior management in India, with a few exceptions to select middle management personnel. However, due to an increase in the number of sales and opportunities to profit, ESOPs have gained popularity in recent years.

"As the amount of exits and sales increases, employees will have more opportunities to cash in and make money." "In India, the true value of an ESOP is now being realised," said Ankur Pahwa, partner and national leader, e-commerce and consumer internet, at EY India. "It's not only a great way for companies to attract talent, but it's also a great way to keep people motivated," he added.

Why Should You Get an ESOP Valuation?

ESOP Valuation is needed for the General ledger, in order to book Compensation expenses by companies issuing ESOPs over the Vesting period, and for Taxation purposes, in order to calculate perquisite Tax payable by its employees. The compensation expense lowers the company's EPS, and the possibility of employees paying Excess Tax may make the ESOP scheme unattractive. As a result, proper ESOP planning is unavoidable, and valuation is crucial.

 

Methods and techniques as well as Perspectives for ESOP Valuation?

In India, ESOP accounting is governed by Guidance Note 18 on Accounting for Employee Share-Based Payments (2005 edn.) The ICAI has issued a statement.

Intrinsic value method using Income, Asset, or Market Approach (like Business Valuation) or Fair Value method (like Business Valuation) can be used to value an ESOP (through Option Pricing valuation including Black Scholes or Binomial method). According to SEBI regulations, even if a Listed Company issuing ESOPs does not use the Fair Value Method, it must still disclose the financial impact in its notes to account as if it used the Option Pricing Method. Fair Valuation for Accounting Purposes is also required by Ind-AS 102.

 

Who is qualified to Esop Valuation?

Just a SEBI Registered (Cat-I) Merchant Banker is authorised to do ESOP/ Sweat Equity valuation for determining perquisite tax payable in the hands of employees, directors, promoters, and others under Indian Income Tax Law.

 

What are the ESOP Valuation Challenges?

By definition, ESOPs give future shareholders a minority shareholding in the firm. As a result, we must use minority valuation methods to arrive at minority shareholder valuation in an ESOP. If any control methodology is being considered, appropriate discounts must be provided backed by evidence and the facts of the case. In the particular instance of Accounting Valuation (for the company) and Tax Valuation (for the employees), due to a large number of possibilities, there may be a discrepancy in the Valuation approach.

 

Our ESOP Valuation Methodology

Our devoted valuation team with vast experience will assist you in measuring the value of ESOP's for option holders. For ESOP holders, MUDS perform a detailed analysis of the Company's history and business, as well as Comparable Company's multiples. We have a specialised ESOP (Employee Stock Ownership Plan) team that ranks among the best ESOP Valuation & RSU Consultants in the country, having completed over 200 ESOP Valuations.

 

EndNote

"In 2020, we saw an increase in the number of startups offering employee stock ownership plans (ESOPs); this was done in many cases to save money while keeping staff motivated to perform consistently. Sanjay Jha, co-founder of MyStartupEquity, LetsVenture's cap table and ESOP management product, said, "There are examples of early-stage, growth-stage, and even unicorn startups leveraging ESOPs for this purpose."

Willis Towers Watson's director of talents and rewards, Arvind Usretay, said that in some cases, startup companies looking to save money may use long-term incentives (LTIs) such as ESOPs as a pay component to increase overall pay. "We could observe that LTI may well be allowed to all employees regardless of career levels in such cases," he said.