How do employee stock options work? What are they?
ESOPs, or employee stock ownership plans, are provided to qualified workers as a retention incentive.
These ESOPs, or ownership plans, are provided in instalments and follow a vesting schedule. They can be converted into equity shares of a corporation. This means that an employee receives ESOPs in phases and must wait the required amount of time before exercising her option to purchase or convert these shares.
New generation firms provide ESOPs to entice talent. The management of the majority of these smaller, rapidly expanding enterprises lacks the financial resources to recruit top expertise, and ownership is frequently one of the draws. With each round of capital that the company obtains, the value of these stock options increases. Either the firm buys back a portion of the shares that have vested, or the buyer offers to buyout the ESOP holders as part of a fundraising round or strategic stake sale. In the past year, a number of startups have announced ESOP buybacks, which have proven to be significant opportunities for their employees to build wealth. As a result, many senior employees have gravitated toward these businesses.
What is the process for valuing a startup?
A loss-making startup can be seen and evaluated differently from a traditional business, which is often valued using the discounted cash flows method, or DCF. These rapidly expanding disruptive businesses are frequently evaluated on:
- The total addressable market (TAM) they are aiming for and the portion of the market they are most likely to corner.
- The rate of expansion
- Economic viability
- Profit pool’s size
Additionally, the assets of traditional firms are typically observable objects like industrial facilities, equipment, and other forms of physical infrastructure. However, a significant portion of these modern firms are founded on immaterial elements like brand, user base, and other things. While these factors are reflected in the P&L of such businesses, it is difficult to determine their value.