ESOPs – The Massive Wealth Generators

Written By:
Team Qapita
October 6, 2023

Employee Stock Ownership Plans (ESOPs) have long been pitched as vehicles for wealth creation, yet often they remain elusive dreams. However, the stories of thousands of employees at companies like Zomato, Nykaa, Paytm, and Policy Bazaar paint a different picture, one where dreams become reality.

We undertook an in-depth analysis of the offering documents of these recently public companies to uncover what the listing meant for their employees. A closer examination of the disclosures revealed some remarkable insights which we decided to share with all through this article.  

Before delving into our findings, it's important to clarify some assumptions made in this analysis.  

  • The numbers are derived from the offering documents and are calculated based on the options granted.  
  • Some options may have been canceled or lapsed, and some may have been sold by employees prior to the IPO. Therefore, the values presented here may be overstated. All values in this analysis are as of the IPO date unless specified otherwise.  

Let's explore what these numbers unveil.

Wealth Generated

For these four companies alone, the combined value of ESOPs held by employees exceeds a staggering Rs 30,000 crores. This wealth has been generated by over 33,000 employees, translating to an average wealth creation of approximately Rs 90 lakhs per employee. It's worth noting that a significant portion of this value is held by senior management, but even after adjusting for this skew, the value per employee remains above Rs 50 lakhs. The real indicator of wealth creation is the net gain after deducting the exercise price.

This table illustrates the remarkably low exercise prices employees paid compared to the IPO prices. As a result, more than 99% of the Rs 30,000 crore value would be realized as pre-tax gains.

Another consequence of this wealth generation is that, when exercised, the government stands to gain tax revenues of around Rs 10,000 crores, assuming options are exercised at IPO prices. This is a substantial addition to the exchequer, and these numbers are likely to grow as options vest and are exercised over the next 2-3 years. The graph above highlights that in the short time since listing, the value has increased by over Rs 6,000 crores.

These astounding numbers pertain to just four unicorns. With more than 40 unicorns, hundreds of soonicorns, and thousands of companies valued at over $100 million, the bigger picture becomes even more compelling.

Concentration of Wealth Generated

Another dimension of this encouraging data is understanding who benefits most from this windfall. The graph above depicts the value owned by Key Management Personnel (KMPs) as a percentage of the total ESOP pool. Collectively, for these companies, KMPs own nearly half of the wealth generated. While this distribution is not alarming or unexpected at an industry level, the variation within these four companies is striking. For instance, in Zomato, KMPs own a remarkable 92% of the Rs 5,000 crore wealth, whereas in Paytm and Nykaa, KMPs own only about a third of the wealth.

Our surveys suggest that at the industry level, senior management teams, which are typically larger than KMPs, receive around 70% of the grants. The concentration seen in Zomato is quite exceptional.

If the diversity observed in companies like Nykaa and Paytm extends across the spectrum, it could lead to genuinely widespread wealth generation, fostering greater entrepreneurship and overall economic growth.

Wealth Generation Beyond IPOs

Over the past 24 months, several unlisted companies have provided liquidity for vested ESOPs held by employees. The value of liquidity provided exceeds Rs 5,000 crores, accounting for roughly 30-40% of vested options and 15-20% of granted options. This trend is expected to grow, with more companies incorporating liquidity as a fundamental aspect of their ESOP plans.

The increasing use of this mechanism signifies that employees no longer need to wait for an IPO event to monetize their ESOP wealth. As more companies go public and provide liquidity, ESOPs are no longer just a dream but a tangible and reasonable means of wealth creation.

Team Qapita

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