Trust Route for Personal Tax Savings & Smooth Cap Table Management

It was a closely held NBFC company at Series B (now listed). The valuation of the company was supposed to see good growth. There were two broad choices –

(i) allow exercise/exit/monetisation of ESOPs to a liquidity event which would tax the entire big gain at salary tax rate; or

(ii) allow exercise early with a right to hold & sell shares upon a liquidity event; so that the substantial portion of the big gain shall be subject to a lower long-term capital gains (LTCG) tax.

Choice (ii) sounded great, but the key challenge was that employees should not come in the cap table as it has its own issues.

An ESOP Trust structure was conceived and after appropriate analysis, it was adopted which was made to hold the shares of the employees after they exercised the ESOPs at an early stage. This ensured not only good Cap table management strategy but also gave a good control over the movement of shares upon employee separations due to various reasons.

Upon sales (say after 3 years of holding by the trust), the delta of gains (Sale price say Rs. 1000 – FMV as on date of exercise say Rs. 200), the gain was subject to LTCG at lower rate. This ensured win-win for both the company and the employees.