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Over the past few years, startups have increasingly dangled the carrot of employee stock ownership plans, or ESOPs, to both hire and retain employees. Today, however, ESOPs are no longer the differentiator they once were. What employees want now is an employer that’s willing to actually buy ESOPs back.

Buybacks became the flavour of the season in 2021, with more than 40 Indian startups—the most ever—giving ESOP holders a chance to cash out, according to Entrackr Entrackr Entrackr Indian startups record highest ever ESOP buyback in 2021: $440 Million Read more . And this trend has only picked up pace. In the first two months of 2022, over a dozen companies—including used car marketplace Cars24, interior decor player HomeLane, and buy-now-pay-later operator Slice—have either committed to or completed buybacks.

This trend has effectively increased the allure of ESOPs, shaking off the slur that they are merely notional games, barely worth the paper they’re printed on. Much of this had to do with the infrequent nature of ESOP exit opportunities in the past, which have chipped chipped The Ken No more takers for the ESOPs opera Read more away at the attractiveness of ESOPs. And with the hiring market turning red-hot, even smaller companies have been pushed to institute buybacks.

Even five-year-old agritech Gramophone—which has just a US$50 million valuation—bit the bullet on buybacks. “Earlier, it was about founders standing in queue for VC money. Now, it is entrepreneurs standing in line to hire employees,” says Vivek Gupta, co-founder of meat delivery unicorn Licious. The six-year-old startup offers employees the option to liquidate their vested ESOPs at any time.

“ESOP is a black box. So, we wanted to make it transparent and bring down the curtain around it,” says Gupta. The six-year-old startup updates the fair market value (FMV) of the shares daily on its ESOP management portal. Anyone who wants to cash in their vested shares can apply to do so and take their money, Gupta explains.

The value created by buybacks is significant. India’s top 30 unicorns account for US$143 billion in valuation. Given that, on an average, anywhere between 5-10% of shareholding in these unicorns resides in ESOP pools, the value of this ESOP pool alone is roughly US$7-14 billion. Approximately 15-20% of this value is likely to have been realised by employees thanks to buybacks, estimates TN Hari, the human resources head of online grocer Bigbasket. Assuming the lower end of Hari’s estimate, this is over US$1 billion in realised gains for employees.

When scarcity of talent outweighs scarcity of capital, there is competitive pressure among companies to outdo one another.

AUTHOR

Arundhati Ramanathan

Arundhati is interested in how people use money in the digital age and how new economies will take shape based on that interaction. She writes the newsletter Ka-Ching! every Monday. She lives in Bengaluru and has spent over 12 years reporting and writing on various subjects.

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