You receive your grant letter, read a couple of stories or hear a couple of podcasts about ESOPs creating life-changing wealth and start dreaming about 10 best things to do with a million dollars.
Sound familiar?
We’ve all been there. But how much are your ESOPs really worth, and how much can they potentially get you if things work out well for the company?
It’s simple enough once you know the basics.
What are they currently worth?
How much are your ESOPs worth now? You can calculate this in the same way you would calculate the value of an equity investment.
Number of options * current value of one share
For instance, if you’re allotted 5000 options and each share of the company is currently worth ₹10, the cumulative value of your granted ESOPs is ₹50,000.
Your company should be sharing this information with you, but if they are not, we’d treat it as a glaring red flag. Though not ideal, there are other ways to pull this out. For one, check the company’s last annual filing with the Ministry of Corporate Affairs, and divide the company’s valuation by total outstanding shares.
Most companies have also begun to be more transparent with employees. With platforms like Infinyte Owners, they are now allowing ESOP holders with ready access to important information (current value of shares, exercise price, number of options) in a single dashboard.
Make a realistic projection of growth
When you join an early-stage startup, your ESOPs will not be worth all that much.
But you can factor in future growth. In fact, that’s one reason why ESOPs at an early stage are so incredibly valuable: startups grow by leaps and bounds and often exhibit exponential growth. Valuations can increase multifold in a few years.
For instance, imagine you’ve received a 100 ESOPs from a startup that is presently valued at ₹10 crore. Assuming 100,000 outstanding shares, the value of each share is ₹1000.
Based on your own estimations and comparative company analysis, you expect that if everything stays on track, the valuation can increase to â‚ą100 crore in the next two years, taking the per share price to â‚ą10,000.
So, the value of your ESOPs goes from â‚ą1 lakh to â‚ą10 lakh!
Now, please note that this is a distilled calculation for the sake of simplicity and actual real-world calculations may have other factors at play.
Calculate tax liability
ESOPs are taxed at two levels — once when you buy the shares, and once when you sell them. The former, also known as the perquisite tax, is charged on the difference between the exercise price of the ESOP and the current market value of the shares.
Continuing with the previous example, imagine your ESOPs have an exercise price of â‚ą10 per share. The current market price is â‚ą100. This difference of â‚ą99 (â‚ą100 - â‚ą1) is what you pay perquisite tax on.
This is notwithstanding the capital gains tax you pay in case of a liquidity event (buyback, acquisition or IPO).
How much do you stand to gain?
Startups may not always become successful enough to give you liquidity.
While the one you work at may go on and do wonders, creating wealth for all stakeholders including you, putting a lid on those dreams. If things don’t go according to plan, your stock options may as well become worthless.
So while there’s no definitive answer here, keep a close eye on upcoming liquidity events. When it happens and under what circumstances will define how much you gain.