ESOPs AND THE CASH-OUT DILEMMA: WHEN LOYALTY MEETS CONCENTRATION RISK

Employee stock option plans (Esops) are a potent tool to ensure that the key employees stay and grow with the company.

- SURESH SADAGOPAN

With startups, the Esop value is notional, meaning it is unlocked only when the company goes public or a buyer is willing to purchase the unlisted shares. If the shares are listed stocks, the wealth potential is real. Esops are a great wealth creator, especially when one is getting regular allotments, which helps build good positions over time. While the positives exist, there are certain things to keep in mind regarding Esops.

Esops can be a concentration risk:

Many have substantial holdings in Esops, which become the most important asset holdings by far. High concentration of one company's shares can be dangerous in a portfolio, and hence, trimming the Esop allocation may be the right thing to do. However, most people (who have the option to sell the shares) do not agree, especially if the Esop shares are doing well. They reckon that holding on to the shares would be in their best interests.

However, we have seen in multiple cases that what looks bulletproof at one point becomes vulnerable and erodes in value due to multiple reasons like competitive intensity, change in industry dynamics, slide in company performance, macroeconomic/geopolitical factors, etc.

Anchor bias: