Qonversations on ESOP Liquidity: ESOP Surrender vs. ESOP Buyback

Written By:
Vishnu Boorla
July 5, 2023
Qonversations on ESOP Liquidity: ESOP Surrender vs. ESOP Buyback

Liquidity, especially in the context of employee stock ownership plans (ESOPs), is an important subject that demands the focus of both companies and employees. Companies make efforts to provide liquidity either through their own resources or with the assistance of investors. In a recent Qonversation, Suchai Iyengar, MD head of Qapita Marketplace, and Jeegar Shah, Senior Consultant at ESOP direct, discuss the significance of liquidity.


In recent years, there has been a decline in the number of liquidity programs, resulting in a decrease in employee interest in joining startups. To ensure the retention of valuable talent in start-up companies, it becomes crucial for them to showcase their ability to offer more than just ESOPs). It is essential for start-ups to demonstrate their capacity to provide liquidity even during challenging times, thereby assuring employees that their investments can be realized when needed.

Various ways of approaching liquidity: In India, there are several avenues available for companies to provide liquidity to their employees. One common approach taken by listed companies and unicorns is to opt for an initial public offering (IPO), which allows employees and shareholders to sell their shares and access liquidity. Another method to provide exit to ESOP holders, is for new and/or existing investors to purchase shares through exercise of vested ESOPs, directly from employees and thereby increasing their own stake in the company. Alternatively, companies may offer employees an alternative to surrender their vested ESOPs) and receive cash based on the prevailing fair market value (FMV). Moreover, companies in exceptional cases, also come up with buyback offer specially for employee shareholders who hold shares pursuant to the exercise of ESOPs, enabling them to sell their shares back to the company. In certain cases, cash settlement is used by PE-driven companies.  

How Companies Looking into financing liquidity: Due to the capital constraints faced by many companies, the number of ESOP surrender programs have decreased. However, companies can still pursue financing liquidity through two methods: ESOP Surrender and ESOP Buyback.

1. An ESOP surrender program is a mechanism used by companies to provide liquidity to their employees who hold vested ESOPs). It allows employees to surrender their vested ESOPs in exchange for cash payments. This approach is often pursued when there’s no liquidity event in the company and as per agreed commitment in plan settlement is due after certain years, which results in high cash-outflow for Company. Alternatively, in case of liquidity event if the Company wants to avoid regulatory and administrative complicated involved in exercise of vested ESOPs and issuance of shares it may opt to settle the vested ESOPs in cash at price similar to which the deal has happened. Overall, ESOP surrender programs offer employees the opportunity to convert their ownership stakes into cash. In some cases, it also helps in settling only separated employees if same is allowed under its plan. Using this alternative gives more flexibility as its less regulated compared to a share buy-back and can be done multiple times a year.

2. ESOP buyback, on the other hand, is more relevant when a company aims to repurchase its shares from ESOP class shareholders. Shares being assets cannot be surrendered. Buyback of Shares is regulated by Companies Act, 2013 and therefore Company must comply with certain pre-conditions before offering buy-back. Companies Act allows a specific buyback offer only to ESOP class shareholders. Buyback reduces company’s share capital. This approach is typically employed when a company wants to clean up its cap table or when the there’s no liquidity event in the company and as per agreed commitment in plan buyback is due after for ESOP class shareholders after certain years.

Also Read: Why ESOPs are More Than Just a Financial Incentive

How the Qapita marketplace is enabling this:  

Qapita is a platform that effectively addresses the issue of employee communication within companies by offering a comprehensive solution. Unlike typical company cap tables where the ESOP pool occupies a relatively small percentage, around 5-10%, with shareholders holding the majority, about 90%, Qapita solves this problem by providing a seamless communication channel between employees and the company. This eliminates the need for employees to switch between different tools and allows them to engage directly with the company on the platform.

One of the key features of the Qapita platform is its end-to-end solution for employees, which allows them to indicate their desired level of participation in terms of liquidity. Within the platform, employees can easily access and navigate features such as exercising shares, buying or selling them, all in one place. Qapita serves as a centralized hub for auditing, tracking, and monitoring employee shares and activities. Additionally, the platform automates the generation of requisite forms, streamlining administrative processes.

Is It possible to sell ESOPs for an Employee: ESOPs, or Employee Stock Ownership Plans, are non-tradable instruments according to legal regulations. They cannot be transferred, used as collateral, or mortgaged by either the company or the employee. Once an option is granted, the employee becomes the owner. However, the resulting shares can be traded if the company permits it, sold to an investor, or repurchased by the company. The approval of the company-level board is necessary for ESOPs, as they involve options and shares, which are considered assets.

Trends from the Last few years of funding winter: According to a recent survey report focusing on unlisted companies, the initial public offering (IPO) market has experienced a deceleration due to fluctuations in the market, leading companies to explore alternative routes such as utilizing existing investors or implementing share buybacks. Additionally, there has been a slight rise in cash settlements, and several companies are opting for employee stock ownership plan (ESOP) surrenders instead of buybacks due to capital constraints. Consequently, this situation presents a favourable opportunity for companies to bring in external investors.  


In conclusion, liquidity is a crucial aspect of ESOPs as it impacts employee retention and company attractiveness. Start-ups must demonstrate their ability to provide liquidity beyond ESOPs to retain valuable talent. Various approaches, such as IPOs, direct share purchases, surrender programs, and buybacks, offer avenues for liquidity. Platforms like Qapita facilitates employee communication and helps streamline processes. Funding winters have led to alternative routes for liquidity, including utilizing existing investors and implementing share buybacks. ESOP trusts play a vital role in managing employee ESOPs and enabling liquidity events.

Reach out to us today to know more.  

Vishnu Boorla

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