Employee Stock Ownership Plans (ESOPs) are changing the way employees create wealth in India’s startup ecosystem. Startups can incentivise loyalty among teams and align employee rewards with their growth by giving them a stake in the company’s success. And if you’re moving towards an IPO, then your ESOPs could become a valuable opportunity for wealth creation.
What Are ESOPs and How Do They Work
ESOPs empower employees by allowing them to buy company shares at a fixed price after a specific period, known as the maturity period. In India, this typically lasts four years. A portion of the share is unlocked each year. Once unlocked, employees can exercise their options and buy shares often at a price much lower than the market value, giving them a sense of control over their financial future.
For startups, ESOPs help attract and retain top talent. They provide employees with a chance to grow financially alongside the company.
ESOPs in Pre-IPO Startups
If your company is heading toward an IPO, ESOPs can bring significant rewards. After listing, employees can sell their shares in the stock market, often at much higher prices than what they paid. This is pre-IPO wealth creation.
We have already witnessed the effectiveness of ESOPs in the startup ecosystem in India. In 2024, Darwinbox’s ESOP buyback program resulted in over 350 employees receiving ₹86 crore. A similar occurrence arose when Meesho announced a $24 million buyback of employee stock options, indicating an emerging trend of real cash benefits for employees from their companies, even before going public.
ESOP Buybacks and Wealth Creation
One significant advantage of ESOPs is the liquidity they provide. You don’t always need to wait for an IPO. Many startups now conduct ESOP buybacks, where they purchase shares back from employees at fair value.
This provides employees with direct cash benefits early in their career journey. With more companies adopting this practice, ESOPs are becoming a strong wealth-building strategy in India’s startup ecosystem.
ESOP Taxation in India
Before you exercise your ESOPs, you must know how they are taxed. In India, there are two stages of taxation:
- At Exercise (Perquisite Tax): The gap between the market value and your exercise price is taxed as part of your salary.
- At Sale (Capital Gains Tax): When you sell the shares, profits are taxed based on how long you hold them.
Employees of DPIIT-recognised startups get some relief. Tax payments can be deferred until the earliest of these events: five years after exercise, sale of shares, or when you leave the company.
Why ESOPs Matter for Employees and Startups
For startups, ESOPs are not just a way to pay employees; they are a strategic tool to build commitment and align long-term goals. Employees act as an ESOP investment strategy with the potential for significant returns, especially in startups moving toward IPOs.
If you hold ESOPs, treat them as part of your wealth plan. Know your maturity timeline, exercise options wisely, and prepare for taxes. With the right approach, ESOPs can turn into one of the most significant sources of financial growth in your career, instilling a sense of optimism about your future economic prospects.
Conclusion
ESOPs are more than just stock options; they are a powerful tool for pre-IPO wealth creation. For employees, they offer a chance to grow with the company & turn the ownership into real financial rewards. For startups, they build loyalty and align teams with long-term success.
If you hold ESOPs or are exploring opportunities in high-growth startups, the proper guidance can make the difference.
At Equentis Investech, we help investors and professionals navigate ESOPs, understand taxation, and build strategies that maximise returns.
Your ESOPs could be the key to future wealth. Let us help you unlock their full potential.
