Mar 25, 2022
ESOP Taxation for Startups in India
ESOPs are liable to taxation. As a company founder, you want your employees to understand the associated legalities and taxes.
Startups are typically unique. They rely on little capital, small space, and an amazing idea. Their biggest asset is undoubtedly the people working in it. The success of any startup is a result of the brains involved, and uniquely every person engaged in one brings something new to the table. Rewarding the people in your company proportionately to your venture's growth is not only ethical and moral but also helps every company to provide worth to their employees and incentivize them enough to retain their talents for the company.
Employee Stock Option Plans (ESOPs) have gained tremendous popularity as a reward-sharing tool among startup founders. It is used to retain talent at all levels of employees and appreciate them for the value they add to the company. Covid-19 played a massive role in bringing ESOP to a resurfaced popularity. With multiple salary hikes and job offers, startup employees had immense opportunities in front of them. To keep them stuck to their job, founders brought ESOPs and many other kinds of rewards in place.
Cash-based compensation is no longer everything required to keep your employees' loyalty intact. ESOPs Buyback is getting bigger and more popular with companies. In 2021, Flipkart announced the biggest ESOP Buyback of $125 Mn. Razorpay, Khatabaook, and Unacademy announced Buybacks of $10 Mn each. The same momentum followed this year. We have seen Indian startup employees making around $159 Mn in ESOP Buybacks.
According to 'State of ESOPs in India' by Siason Capital, 3 out of 5 startups in India use ESOPs. The same report mentions that Indian startup employees made over $335 Mn through ESOPs in 2021, highest in India till now. This number is projected to increase significantly in the coming years.
Why are ESOPs becoming so popular?
Young firms have significantly benefited from employee-ownership programs, and stock options give managers a way to thank employees for accepting the risk of joining a startup. ESOPs are the best approach to acknowledge workers' significant contributions to a company's expansion. It also symbolizes the company's aim to invest significantly in its personnel and support their career development.
The three essential functions of an ESOP are to assist a firm in retaining employees over the long term, reward employees by making them part owners, and build long-term wealth for employees. Employees are also driven to work harder and stay with the firm longer than they would be with capital-sharing arrangements like ESOPs.
Many company owners see their enterprises as investments in their missions. It is improbable that outside investors will be able to recognize the company's true worth. The history of the founders and other essential entrepreneurs may be preserved through ESOPs and employee ownership, enabling a new generation to advance the company.
Finding a suitable buyer while wanting to sell your business is not always straightforward. Businessowners can benefit from flexibility in succession planning and assurance that their employees' employment won't be lost due to a sale by selling their shares to an ESOP all at once or over time.
Bottom Line
With proper knowledge and proper planning, ESOPs are a great tool in the hands of the founder to provide worth to their employers. It is essential the awareness of how ESOPs work and their benefits to all stakeholders is carried on diligently. Learning about ESOPs and adopting them early in your journey can be a wise decision.
