VentureLex Webinar: Crafting a Winning ESOP Program: Build, Align, Retain

Here's a quick summary and takeaways from our webinar on Crafting a Winning ESOP Program: Build, Align, Retain

Panelists

​Nitin Gupta, Founder & CEO, UNI

​Nitin Gupta is a serial entrepreneur and fintech veteran who founded Uni Cards, a pay-later card company. Before founding Uni, he served as the CEO of PayU India and was also the co-founder of Ola Financial Services. His experience spans across leading fintech organizations where he has demonstrated expertise in building and scaling financial products.

​Vikram Sivaraman, SVP - Global GTM, Qapita

​Vikram is a qualified Chartered Accountant and SVP at Qapita - India's largest ESOP management solution serving 40+ unicorns and 30+ Nifty 50 listed companies. Vikram has helped hundreds of companies in structuring ESOP programs catering to their talent needs aligned to the larger objectives of the company.

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Discussion Points and Summary

Purpose of ESOPs and Strategic Value

• ESOPs serve as participation in company value creation
• Most effective for early-stage employees taking significant risk
• Two primary motivations for joining early-stage companies:
  • Excitement of building something new
  • Potential for extraordinary value creation
• Value proposition changes across company stages:
  • Seed stage: High risk, high potential reward
  • Late stage/public companies: More like cash compensation
  • Must align ESOP quantum with risk taken by employee

ESOP Pool Structure and Size

• Recommended pool size: 8-12% for companies using ESOPs as key compensation tool
• Pool should last 2-3 years to avoid dilution discussions with investors
• Factors affecting pool size:
  • Number of senior hires planned
  • Expected team growth
  • Industry standards
  • Location (startup hubs like Bangalore require larger pools)
• Common allocations:
  • Cofounders: 1.5-5% each
  • CXOs: 0.5-2% in early stages
  • Generally not given to employees below ₹15 lakhs salary

Vesting Structures and Types

• Standard vesting: 4 years with 1-year cliff
• Three types of ESOPs:
  • Initial grant: Linear vesting (25% per year)
  • Performance ESOPs: Based on promotions/achievements
  • Retention ESOPs: Back-loaded (10%, 20%, 30%, 40% over 4 years)
• Exercise period options:
  • Conservative: 30-60 days post exit
  • Standard: 1 year
  • Employee-friendly: Up to 10 years

Compensation Structure and Trade-offs

• Salary trade-offs:
  • Below ₹60 lakhs: Maximum 20% salary cut
  • Above ₹60-80 lakhs: Can consider higher cuts
• ESOP compensation ratio:
  • For salary cuts: 1:3 or 1:4 (₹5 lakhs salary reduction = ₹15-20 lakhs in ESOPs)
• Communication best practices:
  • Early stage: Discuss in percentages
  • Later stage: Focus on absolute value
  • Use rupee values for junior employees

Legal and Compliance Requirements

• Must draft ESOP scheme document
• Requires board and shareholder approval
• Mandatory filing with Registrar of Companies (ROC)
• Restrictions:
  • Indian companies can only grant ESOPs to full-time permanent employees
  • Promoters cannot receive ESOPs (exception: DPIIT-recognized startups)
• Alternative: Phantom stocks for non-employees/consultants

Valuation and Pricing

• No statutory requirement for valuation certificate
• Common benchmarks:
  • Last funding round valuation
  • Draft term sheets
  • Founder’s justified valuation
• Strike price considerations:
  • Early stage: Often set very low
  • Later stage: May be set at fair market value
  • Tax implications on difference between strike price and fair market value

Employee Communication and Engagement

• Regular town halls recommended for transparency
• Share company financials and valuation updates
• Use automated systems/employee portals to track value creation
• Communication guidelines:
  • Junior employees: Focus on absolute numbers
  • Senior employees: Can discuss percentages
  • Avoid complex dilution discussions with junior staff

Special Cases and Exceptions

• Phantom stocks/SARs for non-employees:
  • Cash-settled instrument
  • Requires investor approval
  • Should be included in cap table calculations
• Handling existing employees when implementing first ESOP:
  • Honor past service with accelerated vesting
  • Split allocation between past recognition and future vesting
• Performance management:
  • Initial allocations standardized by level
  • Performance-based allocations vary by individual
  • Retention grants typically standardized

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