Recruiting skilled workers remains one of the burdens of a startup due to fund limitations in the initial phase of business. Employees with extensive knowledge and experience demand full security in terms of salary and other perks. Many founders tend to balance frail startups with other occupations or freelance gigs, and rely on part-time consultants and advisers to build their ventures. Their cash flow is also not robust, which means they cannot afford to pay high salaries. In this case, startups use stock options such as Employee Stock Option Plans (ESOPs) as the primary form of payment.
Employees are given ownership in the startup, which makes them go beyond their immediate roles and reflect on the long-term vision of the company. The companies usually incorporate time- or milestone-based vesting schedules, which incentivise employees to stay and contribute to the company’s growth.
Restricted Stock Units (RSUs) And Employee Stock Option Plans (ESOPs)
An ESOP is a form of employee-benefit plan that is designed to provide a company’s workforce with an ownership interest in it. Some startups have the practice of offering Restricted Stock Units (RSUs), which represent shares but are restricted until certain conditions are approved. Founders frequently offer ESOPs to consultants and part-time mentors through the formation of co-ownership trust in the form of stock appreciation rights (SARs), phantom stocks etc.
Previously, Swiggy and Zomato, two of India’s leading food-delivery platforms, have implemented substantial ESOPs to attract, retain, and reward their employees. In July 2024, Swiggy announced its fifth ESOP liquidity programme, allowing employees across various levels and departments to liquidate up to $65 million worth of their vested stock options. This initiative marked the company’s cumulative ESOP liquidity facilitation to over Rs 1,000 crore, benefiting more than 3,200 employees, as per reports. Following its initial public offering (IPO) in November 2024, Swiggy ESOPs significantly benefited its workforce. Approximately 5,000 employees gained financially, with nearly 500 becoming crorepatis. In October 2024, Zomato granted nearly 12 million stock options to eligible employees under its ESOP 2014 and ESOP 2021 schemes. These options, valued at approximately Rs 330.17 crore, aim to motivate employees by providing long-term wealth-creation opportunities. Earlier in 2024, Zomato received shareholder approval to expand its ESOP pool by issuing 183 million additional shares, reflecting the company’s commitment to employee welfare and retention.
Startups can leverage ESOPs as a strategic tool to attract top talent, compensate for lower salaries, and drive long-term growth. ESOPs not only help in talent retention but also create financial incentives that align employees’ interests with business performance. To maximise benefits, startups should design structured vesting schedules, ensure compliance with regulatory frameworks, and explore innovative solutions like co-ownership trusts or SARs for non-employee contributors. Additionally, educating employees on ESOP taxation and liquidity options can enhance participation and trust. As seen with Swiggy and Zomato, well-implemented ESOPs can significantly boost employee morale, reduce attrition, and foster a culture of ownership, ultimately fuelling a startup’s long-term scalability and market success.
The writer is a CS, and advocate practising in the Supreme Court of India.
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