The ESOP wave: Why employees are cashing in like never before

In the ever-evolving landscape of employee compensation, 2024 has revealed a striking paradox—while base salaries have remained relatively flat, employee wealth creation has surged to unprecedented levels. The driving force? Employee Stock Ownership Plans (ESOPs), which have evolved from a startup retention tool into a wealth-multiplication engine. The numbers tell the story—26 unlisted companies executed strategic buybacks this year, marking a clear inflection point in how both employers and employees perceive equity compensation.

Traditional metrics for measuring employee compensation are rapidly becoming obsolete. Senior executives are now negotiating packages where ESOPs account for 40-50% of total remuneration. This shift reflects not just an increased risk appetite but a deeper understanding of wealth creation in high-growth companies. The surge in ESOP liquidity events—totalling $252 million in 2024—coincides with a broader transformation in India’s startup ecosystem. Companies like Swiggy, with its $65 million buyback, Urban Company’s $63 million ESOP encashment, and Whatfix’s $58 million program underscore this evolution.

Companies that offer regular ESOP liquidity events typically command premium valuations in their segments. Such organisations demonstrate stronger employee retention and more stable growth trajectories—direct outcomes of aligning employee and shareholder incentives. Pre-IPO ESOP liquidation events signal market maturity and serve multiple purposes: they provide liquidity to employees, enhance retention during critical growth phases, and reinforce market confidence ahead of public listings.

Managing ESOPs: A strategic approach

The vesting period dictates how long employees must stay with a company before their ESOPs fully vest. A typical structure vests 25% of shares annually over four years. For listed companies, ESOP shares often carry a mandatory lock-in period post-IPO, typically ranging from six months to a year.

While ESOPs offer lucrative returns—some employees have seen 10-15x gains—proper risk management is crucial. Ideally, ESOP exposure should be limited to 10-15% of an employee’s overall portfolio to prevent overdependence on a single asset. Employees should leverage partial liquidation strategies during buybacks and reinvest proceeds into diversified asset classes. Evaluating a company’s governance, growth trajectory, and potential exit timelines is equally important.

Regarding exit and redemption, companies typically offer buybacks at fair market value when employees depart, ensuring equitable compensation. However, employees should be mindful of fortification periods before share buybacks, liquidity constraints in unlisted companies, and tax implications upon exercising ESOPs and selling shares. Understanding liquidity event timing—such as funding rounds or IPOs—is crucial for maximising returns.

Looking Ahead: The ESOP boom in 2025

Several factors indicate that the ESOP boom will accelerate in 2025. The success of recent IPOs has created a clear blueprint for wealth creation through ESOPs. Companies planning public listings within the next 24-36 months are already restructuring their ESOP policies to attract and retain top talent. Meanwhile, ESOP structures are becoming more sophisticated, moving beyond basic vesting schedules to incorporate secondary sale windows that allow employees to monetise holdings while maintaining equity stakes.

For companies, well-structured ESOP packages are becoming a key differentiator in talent acquisition and retention. The challenge lies in balancing immediate attractiveness with long-term sustainability. For employees, ESOPs are no longer just a lottery ticket—they require careful evaluation and strategic planning. Factors such as company growth potential, exit opportunities, personal financial goals, risk tolerance, tax implications, and vesting requirements must all be considered.