Employees in Kunal Shah’s fintech startup, Cred, can now get upto 50% of their fixed salary in the form of Employee Stock Option Plan (ESOP)!
No kidding, the company is offering its employees an option to opt for an ‘Accelerated Wealth Programme’ so that they can also join the company in its growth story.
Sounds very exciting, right? But what is ESOP anyways?
The employees of Cred can choose to get shares of Cred at a price that is usually lower than its market value. Hypothetically, if one share of Cred is worth $200 then the employee can choose to buy them at a price lower than $200.
Well, giving ESOPs is a common practice. Especially among startups that are looking to hire highly motivated and talented people without having to pour out salaries in the form of cash.
When an employee owns a piece of the company, they have a greater incentive to put their hearts into the growth of the company. Also, it saves the company from cash payouts, which can be used to better handle the operations of the company. Win-win, no?
Cred is now offering a big chunk of fixed salary in the form of shares!
So instead of getting salary in hand, you can invest it in the shares of your employer at a lower price and simply sell those later at a higher price. This way, you make more money than you could with your fixed salary. That’s super cool, no?
Well, well. Good deals usually come with certain riders. So do ESOPs.
First, you don’t get the right to buy the shares straightaway, duh!
At the end of every month, you are entitled to get your salary for that period. For Cred employees, if you opt for ESOPs, you will be allocated something called ‘grants’ instead of your salary. These grants are like tokens that will get converted into the right to buy shares only after one year.
Say if you get grants to buy 5 shares in Oct 2021, you can only get the right to buy 5 shares in Oct 2022.
Yes, you get the ‘right’, and not the shares. Meaning you don’t have to compulsorily buy these shares in Oct 2022. You can buy them anytime after that. But even this ‘anytime’ comes with certain conditions.
Say if you leave the company, the company might mandate it for you to buy the shares within a couple of weeks (or else the option lapses). Also, the price of the ESOP is determined by them.
All of these conditions related to ESOPs are written in the agreement that you sign when you agree with the compensation structure. You should always read it carefully. If you feel out of the water, you should engage a legal advisor to suggest the best course of action.
Now, let's say you have exercised your option and bought the shares, what next?
You might want to sell those shares, right?
Bad news, with startups you get very rare opportunities to sell your shares. You either wait for the startup to buy these shares from you (happens when some investor wants to invest in the company) or you wait for an IPO which might or might not happen for long.
But to gain the employees confidence in the profitability of ESOPs, recently a lot of startups started buying back from the employees. In January 2021, Cred itself bought ESOPs worth $1.2 million from its employees.
Well. There is another layer of complexity: Taxation of ESOPs.
You buy the shares at a lower price. You are jumping with joy, thinking about the amazing profits you will get to book in the future. For now, your pocket is empty and you are okay with it.
But the tax people think that you ‘gained’ from buying at a lower price and they want their share of taxes. For the employees of a startup (and not for other companies), this collection timeline has been extended a little. They don’t have to instantly pay taxes. However, one could still find themselves in a situation where they don’t have money, but the tax folks are knocking at their doors.
The sky's the limit when you think of gains in ESOPs. But at the same time, there is also the risk of share prices crashing and you could lose your hard-earned money.
You should always account for your own liquidity needs and risk appetite. Before taking the ESOP plunge, you should also be aware of all the consequences of situations that could arise in the future.
If you were in Cred would you choose ESOPs? Let us know in the comments!
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