ESOP Liquidity Event planning – purchase of Shares by Investors

A reputed unlisted NBFC had implemented an ESOP plan through trust. The ESOP Plan structure allowed exercise and monetization only upon Liquidity events namely IPO, Strategic Sale, Purchase by Investors, etc.

With a new in-coming investor, the IPO is scheduled beyond original horizon. The Company considered monetization of ESOPs as it was 5 years since 1st vesting of ESOPs. There were many ways including buy-out of ESOPs by Cash payout by the Company or allowing a purchase by the incoming investor. There were two broad challenges (i) to find out most effective way, and (ii) making of an execution road-map for the selected way.

A comparative analysis was done from the perspectives such as cash outflow of company, effective accounting cost net of corporate tax saving, saving of equity, tax impact on all persons in the ESOP eco-system, transactional difficulties, paper formalities, etc.

It was finally decided for exercise and subsequent purchase by the investor. In fact, it was a cashless exercise for the employees. Employees got the gain without cash pain, company got corporate tax savings without any cash outflow and investors got the shares.