ESOPs have become a favourite tool for startups to attract and retain talent when they can’t always pay top salaries. In simple terms, an ESOP gives employees the right to buy company shares in the future, usually at a pre-decided price, if they stay for a certain period and meet conditions.
Legally, ESOPs must follow company law, securities rules and any specific scheme terms approved by the board and shareholders. The plan typically defines eligibility, vesting schedule, exercise price, lock-in conditions and what happens if an employee leaves or is terminated.
From the employee’s perspective, ESOPs can be valuable, but they are not guaranteed cash. Their worth depends on the company’s future performance, valuations and liquidity events like IPOs or acquisitions. It’s important to read the scheme, understand tax implications and ask questions about exits and buy-back options.
For founders, ESOPs dilute ownership but can create strong alignment with key team members. Transparent communication and proper documentation are crucial. Poorly designed or casually managed plans can result in disputes, regulatory trouble and broken trust.