Payouts by tech startups through employee stock ownership plans (ESOPs) are set to go up this year, bolstered by a recovering funding landscape, buoyant public markets, and an increase in secondary transactions.
Activity surrounding ESOP liquidity has been rising steadily over the past year, as the startup ecosystem continues to recover from the so-called funding winter. Since the start of this year, several large listed startups have expanded their ESOP plans by allotting additional shares to their staff.
Earlier this week, food and grocery delivery major Swiggy allotted 2.61 crore shares worth Rs 1,154 crore for its ESOP scheme. A week earlier, Paytm-parent One97 Communications expanded its ESOP plan by allotting more than 2 lakh stock options worth Rs 18.27 crore.
Beauty and personal care brand Mamaearth’s parent Honasa Consumer allotted 45,663 stock options, valued at Rs 1.12 crore, to eligible employees.
Earlier this week, food and grocery delivery major Swiggy allotted 2.61 crore shares worth Rs 1,154 crore for its ESOP scheme. A week earlier, Paytm-parent One97 Communications expanded its ESOP plan by allotting more than 2 lakh stock options worth Rs 18.27 crore.
Beauty and personal care brand Mamaearth’s parent Honasa Consumer allotted 45,663 stock options, valued at Rs 1.12 crore, to eligible employees.
As many as 26 startups announced ESOP buyback programmes in 2024, up 19 percent from the previous year, data compiled by Qapita, a digital equity management firm for private companies, shows.
The total value of these programmes was $252 million against $825 million in 2023. However, 2023 also saw Flipkart’s bumper $700 million buyback plan. Accounting for this aberration, the total value stood at $125 million, Qapita data shows.
Startup IPOs buoy ESOP liquidity
According to Ravi Ravulaparthi, CEO and co-founder, Qapita, the reason for the overall positivity surrounding ESOP payouts is India’s buoyant markets.
“The ultimate liquidity for ESOP holders occurs when the company lists on the stock exchanges and creates liquidity at scale. This was strong in 2024,” he said.
As many as 13 startups opted for initial public offerings (IPOs) in 2024, together raising more than Rs 29,000 crore. These include bumper listings from Swiggy, Ola Electric and FirstCry. The figure is expected to double this year, with at least 25 startups eyeing market debuts, as reported by Moneycontrol.
Several of these startups announced ESOP buybacks. In July, Swiggy announced its sixth buyback programme worth $65 million. The Bengaluru-based food delivery firm’s IPO minted 500 crorepatis and put a whopping Rs 9,000 crore in the hands of 5,000 staffers.
Similarly, IPO-bound firms such as Urban Company ($63 million), Whatfix ($58 million), OfBusiness ($11.7 million) and Meesho ($25 million) also announced buyback programmes.
The strong market performance of startups also led to a surge in pre-IPO funding, which has also been a factor in driving up ESOP liquidity.
“Pre-IPO funding rounds often involve secondary transactions where investors buy shares from existing shareholders, including employees. This has provided employees with more opportunities to liquidate their ESOPs before the company goes public,” said Shravan Shroff, co-founder, ESOPDhan.
ESOPs as a retention tool
Employees are granted shares of companies through ESOPs, depending on the length of their employment. Until a few years ago, ESOPs were not as attractive a proposition for startup employees but this has changed recently.
ESOP payouts by several listed and unlisted startups, including Zomato, Paytm, Delhivery, and Flipkart, led to $1.46 billion of wealth in the hands of their employees between 2021 and 2023, Qapita data shows.
ESOPS are also being used as a tool to attract and retain talent amid rising competition, especially in growth-stage companies.
“ESOPs are great for me to retain and pull talent from a larger organisation. An employee joining my company will have the chance to increase the worth of their ESOPs by 4X-5X in a few years because we’re a fast-growing company. The upside is massive. That’s the hook I use to sometimes attract top talent from my rivals,” a founder at a large startup told Moneycontrol, requesting not to be identified.
According to the founder, an employee working at a rival company, which is already large, will only see their ESOPs increase by a few percentage points. This incentivises staffers to join firms with smaller valuations, which present a greater upside for wealth creation.
This trend is especially prevalent in rapidly growing sectors like quick commerce where companies such as Swiggy, Blinkit and Zepto have been recruiting executives from rivals Flipkart and Amazon, as competition gets fierce.
Industry watchers are of the view that ESOP payouts, both in number and quantum, will increase further in 2025, driven by buoyant primary markets and a strong IPO pipeline.
“With signs of recovery in startup funding, ESOP liquidity programmes and payouts are expected to rise further in 2025,” said Ritika Mathur, Partner, Grant Thornton Bharat.
More startups reaching late-stage funding or preparing for public market debuts, increased investor confidence and the possibility of larger secondary components in funding rounds are the key factors at play, she said.
To keep the momentum going, startup industry stakeholders have also called for the government to rationalise taxation on ESOPs.
The article originally appeared on MoneyControl.
