Employee Stock Ownership Plans, or ESOPs, have become one of the most powerful tools for unlisted companies to reward their employees, retain top talent and create long-term value. In India, startups and privately held firms are increasingly adopting ESOP structures not only to motivate employees but also to offer an alternative wealth-building option similar to investing in unlisted shares. But how exactly do ESOPs work for unlisted companies?
What ESOP Means for an Unlisted Company
In an unlisted company, ESOPs function as a mechanism through which employees receive ownership in the form of equity shares that are not yet listed on the stock exchange. Since these shares are not publicly traded, their value is determined through fair market valuation, done periodically by certified valuers.
ESOPs allow employees to become stakeholders in the firm’s growth. As the company expands, its valuation increases and so does the value of the ESOPs held by employees.
How ESOPs Are Created and Allocated
Unlisted companies typically create an ESOP trust. This trust receives a pool of shares either by direct issuance from the company or by the company contributing funds to the trust to purchase existing unlisted shares.
Employees are granted ESOPs based on performance, tenure or strategic importance. These options do not become usable immediately. Instead, they follow a vesting schedule, usually spanning 3-4 years. Once vested, employees gain the right to exercise the ESOPs and convert them into actual shares.
How ESOPs Generate Wealth in Unlisted Companies
When employees exercise their ESOPs, they buy the shares at a pre-decided exercise price, which is usually lower than the company’s current fair market value. The difference becomes their gain. Later, employees can monetise these shares in several ways:
• Company Buyback: Many unlisted firms conduct periodic buybacks at higher valuations.
• Secondary Market Sales: ESOP holders can sell shares to pre-IPO investors or ESOP marketplaces.
• IPO Listing: When the company goes public, ESOP holders can sell their shares on the exchange.
This process turns ESOPs into a powerful wealth-creation tool for employees.
Why Unlisted Companies Prefer ESOPs?
For unlisted firms, ESOPs offer multiple advantages. They help with employee retention, improve productivity, support smooth ownership transition for founders and offer tax-efficient liquidity. They turn employees into long-term partners, aligning their efforts directly with the company’s future.
With India’s startup ecosystem maturing, ESOPs have become a core part of compensation structures. For employees, they represent not just a bonus but an opportunity to participate in the company’s eventual growth story.
