Can your 9-to-5 make you the next millionaire? Many believe it can, especially when equity is part of their compensation package. The Employee Stock Ownership Plan (ESOP) has become the new normal in the Indian startup ecosystem. To attract top talent, most startups offer employees stock options in addition to their salaries. Employees, in turn, think they are in line for life-changing gains if the startup goes public. As a result, they often negotiate hard for a substantial amount of stock options when accepting an offer. The real question remains: when a company decides to go public, how much do employees actually make in an IPO? Does it truly change their lives?
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What happens to employees in an IPO?
Before we delve into the data, let us understand what happens to employees during an IPO. In an IPO, employees can choose to hold onto or sell the company shares they own. Once the IPO is launched, a lock-up period begins. Typically, this lock-up period lasts from 90 to 180 days, during which company shareholders are not allowed to sell their shares. Employees have the option to purchase company stock at a specified price per share, known as the strike price. This price is fixed when they receive the stock options upon joining the company. If the stock price exceeds the strike price, employees can sell their shares for a profit. It is important to note that capital gains tax applies when they sell the shares, depending on the holding period.
How much do employees get when the company goes public?
1 Finance Magazine has conducted a thorough analysis of IPOs launched between 2014 and 2024, shedding light on who truly benefits when a company goes public. The findings show that ₹6,09,833 crore was raised through IPOs in the last decade. Of this total, 63.6% (₹3,87,945 crore) was generated through Offer for Sale (OFS), while 36.4% (₹2,21,888 crore) came from fresh issues.
According to the research, domestic promoters garnered the largest share, retaining 72.4% of the proceeds from OFS. Institutional investors received 17.5%, and individual investors accounted for 10%. How much did employees receive? Only 0.1% of the domestic IPO proceeds, according to 1 Finance Magazine’s research.
| Who Makes the Most When the Company Goes Public | |
|---|---|
| PARTICULARS | % OF DOMESTIC OFS PROCEEDS |
| Institutional Investors | 17.5% |
| Promoter(s) | 72.4% |
| Employees | 0.1% |
| Individual Investors/ Others | 10.00% |
Source: 1 Finance Magazine
To illustrate, if a company raises ₹100 crore via an OFS during its IPO, the distribution would look like this: promoters would take home ₹72.4 crore, institutional investors would get ₹17.5 crore, individual investors would receive ₹10 crore, and employees would end up with just ₹10 lakh. If 50 employees hold stock options in that scenario, each would receive only ₹20,000 upon the IPO launch. However, the employees can expect liquidity of their stock options, once vested, if the company gets listed and they can share the same post-listing, subject to lock-in conditions.
Don’t rely on ESOP for your retirement savings
The glitzy headlines like “This Employee Makes a Million After His Company Goes Public” are appealing to hear and great to read, but they are not the reality for everyone. While such stories may be true for some individuals, they are not the norm for all. If you are relying on your ESOP to secure your retirement savings or achieve any other financial goals, be cautious. Start sorting out your finances, and consider talking to a financial advisor for guidance on managing your finances for signficant events, rather than depending solely on the equity options in your compensation package.
