SPACs as Alternative Investment: A Critical Review

by Sandeep Kumar


The present SPAC ecosystem

Why are companies getting involved in the SPAC craze?

         Data Souse: SPACInsider

Downsides of going Public via SPAC

         Data Souse: SPACInsider

What Impact Do SPACs have on Private Equity?

Future Outlook

Will the SPAC boom stay?



Flourishing ESOPs in Indian Startups: How can employees make the best of this opportunity

by Sandeep Kumar

Growing Potential of Employee Stock Options in Indian Startup Landscape

This year has proved to be a great year for Indian startups and their employees. With growing valuations and better performance, a large number of companies are opting for ESOPs which has now formed an integral part of the startup compensation system. As a result, many employees were able to earn a fortune overnight.

Employee Stock Ownership Plan (ESOP) is an employee benefit plan that offers employees an option to gain an ownership interest in the company in the form of company shares that are offered to the employees at a pre-determined discounted price. ESOPs convert employees to owners by giving them an opportunity to participate in the future growth of the company by owning a part of it, but also are a great tool to motivate and retain talent.

According to KPMG’s ESOP Survey Report (2021), about 68% of the total respondents have either already implemented an ESOP plan or a similar employee benefits program or are contemplating having one. Of these companies, 72% are private companies. In India, the majority of companies offering the ESOP option to their employees belong to the software and startup sectors. As tech companies have started to realise the growth potential and benefits of the ESOP market, other industries such as Financial Services, Consumer Goods, Automobile sector, etc. have also started adopting ESOP programs for their employees.

Source: KPMG India’s ESOP Survey Report (2021)

Indian Startups on ESOP rush

Investing early on in ESOP options of start-ups can offer great returns to the employees. As of November estimates, ten leading start-ups that have been now either listed or preparing to list soon, have generated over $5 Bn returns for their employees through ESOPs.

Indian startup employees have created a fortune through their ESOP plans as the company’s valuation surged. Freshworks, an Indian SaaS startup, turned 500 of its employees into millionaires overnight as it got listed in NASDAQ this year. Almost 76% of the company’s employees own Freshwork’s shares. Looking at the fashion e-commerce brand Nykaa’s successful IPO launch, the top six employees of the company are estimated to have unlocked way more than the expected $115 Mn of value through their shareholdings and vested options. Even food delivery app, Zomato which had an ESOP pool of $745 Mn at the time of its IPO has now more than doubled in value to $1.5 Bn.

Following the trail, many Indian tech startups are now expanding their ESOP pool to retain the interests of their workers.

Recently, Meesho announced MeeSOP, an ESOP-for-all programme, that would allow all its permanent employees to have a stake in the company’s shareholding, irrespective of their position or tenure in the company. With this, the company aims to break the traditional hierarchy to make every employee an owner. This will allow all its employees to realise their personal and financial goals along with organisational goals, as employees will be able to cash in on the company’s frequent ESOP liquidation drives. Meesho is a high-growth startup, whose valuation is only expected to grow in the future. Hence, the company’s workers will be able to enjoy high gains in the future, given they exercise their vested options.

According to some sources, it is estimated that 80% of employees of the hotel aggregator platform, OYO have been granted the company’s ESOPs. As of September 2021, OYO has an ESOP pool of about 470 million shares of which 11,739 options are exercised. With its IPO coming up and an estimated post-IPO valuation of $10 Bn, it will create a total wealth of $688 Mn for its employee shareholders. Another IPO-bound company, Snapdeal has also expanded its ESOP pool by 151%, offering a total of 5,000,000 ESOP options.

While these are only some of the examples, many more startups are adopting the method to retain top talent — including PhonePe, Licious, Udaan, ShareChat, OfBusiness, Urban Company, to name a few. It is estimated that from January 2020 — July 2021, Indian startups have added $700 Mn worth of stocks. During H1 of 2021, nine companies expanded the pool to more than $170 Mn and the number is expected to have been doubled in the H2 of 2021. Looking at the fortune created by employees of companies like Freshworks and Nykaa, other startup employees also hold a chance to become Crorepatis. However, some hurdles set back workers from exercising their options.

Source: Entrackr

Problems faced by ESOP holders in exercising their ESOPs

As fascinating as they sound, exercising ESOPs is not a straightforward task. Not many employees are even aware or care about how to exercise or when to exercise ESOPs. Read more about the correct time to exercise ESOPs and tax obligations in other articles published on the same channel. As per our estimates, between 70% — 80% of vested ESOPs in unicorn and soonicorn companies go unexercised every year due to the problems faced by employees. This leads to billions of dollars of lost value for them.

Lack of understanding, delay in approvals, and lack of transparent communication from their companies are some of the reasons which hold back employees from exercising their options. Apart from this, heavy tax obligations are a major problem. While exercising ESOPs can provide massive gains to the employees, a major proportion is lost in paying the taxes. As a result, many ESOP holders across companies do not exercise their options as they do not want to pay the capital gains tax. Financing an ESOP can be a costly affair, even for the financially affluent workers.

ESOP Taxation in India

Let us understand what will be the tax implications on ESOPs for an Indian employee.

One may be liable to pay ESOPs tax on two occasions as an employee.

  • First, when the shares are allotted as a result of exercising vested options (taxed as salary income)
  • Second, when the shares are sold as a result of exercising the vested options (taxed as salary income) (taxed as capital gains).

Now let’s look at how ESOP taxation will work:

The first level of taxation (when the option is exercised):

ESOPs would be taxed as a requirement, with the value given as:

The perquisite value of an ESOP will be included in X’s salary and will be taxable in the year in which the shares are allotted. On such an amount, the employer is required to deduct TDS.

The second level of taxation (when ESOPs are sold):

When Mr. X sells the stock, he will be subject to capital gain tax, which will be calculated as follows:

Because X has held the shares for less than a year (counting from the date of allotment), the gains will be categorized as short-term capital gains and will be taxed at the standard slab rates applicable to X.

How Can ESOP Holders Grab the Opportunity?

Due to lack of clarity and huge costs involved, we have seen more than 2,000 shareholders in the past 12 months who are paper rich and cash poor and have made several wrong decisions when it comes to their private shares’ ownership. We aim to make employees aware of these opportunities and help them grab the vested opportunities. As a result, Torre Capital helps ESOP holders with funds required to exercise the stock options and pay tax obligations, with no recurring monthly interest payments, unlike a traditional loan. It is advisable to exercise stock options early so that one can reduce their tax burden and also exercise price in certain cases.

In case of a company’s liquidation event, if the firm has a successful exit (such as an IPO), you repay the principal along with a certain percentage of upside (ranging between 30% to 70%, depending upon the stage of the growth startup) back to your investors. On the flip side, we bear all risks related to performance issues with the investee company, delays in IPO/other liquidation events, or closure/bankruptcy scenarios. Your other personal assets are never at risk because it is non-recourse finance.

So, if you are an employee looking forward to exercising your ESOP options, Torre Capital can provide you with the best and the most convenient exercise and financing journey. Reach out to us at [email protected] in case you wish to know more and seek further assistance.

. . .

This article has been co-authored by Tamanna Kapur and Sayan Mitra, who is in the Research and Insights team of Torre Capital.

For exclusive information about additional research and insights by our Analysts, kindly subscribe to Torre Capital’s Blog.

If you are an investor or shareholder and want more advice about the Pre-IPO secondary markets, please feel free to reach out at [email protected] for investment advice, or register for an account at Torre Capital.

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