Startup FAQ's
What are employee stock options and how do they work?
ESOPS or employee stock ownership plans are given to eligible employees as an incentive to retain them.
These ESOPS or ownership plans that can be converted into equity shares of a company, are issued in parts and have a vesting schedule. Which means that an employee is allotted ESOPS in a phased manner and must wait for said period before she can exercise her right to buy/convert these shares.
ESOPS are offered by new gen startups to attract talent. In most of these fast-growing smaller companies, the management do not have the financial bandwidth to attract senior talent and often equity is one of the attractions. The value of these stock options grows with each funding round that the company raises. Either the company buys back a part of the vested shares or in case of a funding round or strategic stake sale, the buyer offers to buyout, providing liquidity event to the ESOP holders. The spate of ESOP buybacks announced by startups in the last 12 months have proved to be a major wealth creation opportunity for their workforce and hence have ensured a lot of senior talent also gravitates to these companies.
How does startup valuation work?
While traditional businesses are valued on the discounted cash flows or DCF basis, there is a different way to look at and value a loss making startup. These fast-growing disruptive companies are often measured on -
1) Total addressable market or TAM that they are targeting and the share of that pie that they are likely to corner.
2) The growth rate
3) Business sustainability
4) Size of the profit pool
Also, for traditional businesses, the assets are generally tangible things like manufacturing plants, machinery and other physical infrastructure. However, a large part of these new age businesses are built on intangible aspects such as brand, user base and other things. While these things get reflected in the P&L of such companies, it becomes hard to define their worth.
ESOPS or employee stock ownership plans are given to eligible employees as an incentive to retain them.
These ESOPS or ownership plans that can be converted into equity shares of a company, are issued in parts and have a vesting schedule. Which means that an employee is allotted ESOPS in a phased manner and must wait for said period before she can exercise her right to buy/convert these shares.
ESOPS are offered by new gen startups to attract talent. In most of these fast-growing smaller companies, the management do not have the financial bandwidth to attract senior talent and often equity is one of the attractions. The value of these stock options grows with each funding round that the company raises. Either the company buys back a part of the vested shares or in case of a funding round or strategic stake sale, the buyer offers to buyout, providing liquidity event to the ESOP holders. The spate of ESOP buybacks announced by startups in the last 12 months have proved to be a major wealth creation opportunity for their workforce and hence have ensured a lot of senior talent also gravitates to these companies.
How does startup valuation work?
While traditional businesses are valued on the discounted cash flows or DCF basis, there is a different way to look at and value a loss making startup. These fast-growing disruptive companies are often measured on -
1) Total addressable market or TAM that they are targeting and the share of that pie that they are likely to corner.
2) The growth rate
3) Business sustainability
4) Size of the profit pool
Also, for traditional businesses, the assets are generally tangible things like manufacturing plants, machinery and other physical infrastructure. However, a large part of these new age businesses are built on intangible aspects such as brand, user base and other things. While these things get reflected in the P&L of such companies, it becomes hard to define their worth.
