ESOP and Company Performance

1. Overview

When you receive an ESOP, you’re not just receiving a bonus but you’re becoming a partial owner of the company. This means the value of yours shares or options depends directly on how well the company performs over time.

This article explains how company performance impacts your ESOP, and what factors you should be aware of as your company grows, raises funding, or faces challenges.

2. Company Performance – Why You’d Benefit As The Company Grows

You might have seen companies labeled as Seed, Series A, Series B, and so on. These refer to the funding rounds startups go through as they grow. Each time a company raises new capital, it sets a new valuation — which directly impacts the value of your equity.

The idea is simple:

• If the company’s valuation increases, the potential value of your equity goes up.
• If the valuation drops in a later round, your equity may be worth less than before.

This valuation helps determine the Fair Market Value (FMV) of the company’s shares — the estimated price per share at that time. The FMV matters because it influences the strike price of new stock option grants. As the valuation changes, so does the gap between:

• Your strike price (what you pay to buy shares)
• And the market value (what the shares are actually worth)

The wider the gap (with market value above strike price), the more profitable your options may be — if and when you’re able to sell.

3. What If the Company Doesn’t Perform?

Startups and private companies often come with high potential — but also high risk. It’s not uncommon for companies to struggle raising funds or to raise funds at a lower valuation than before (this is known as a down round).

When that happens:

• The paper value of your equity may decrease.
• If the new Fair Market Value (FMV) falls below your strike price, your options are considered underwater.

While this can be discouraging, it’s important to remember:

• You don’t lose real money unless you choose to exercise and sell.
• If you stay with the company and it recovers, your options may regain value in the future.

Equity is a long-term incentive. Value may go up and down — but it only becomes real once you take action (like exercising or selling).

4. Other Considerations

Apart from valuations, some companies tie equity value to milestones or performance targets, such as revenue, product launches, or company-wide metrics.

Ultimately, it is important to remember that ESOPs are a potential benefit, and not a guaranteed payout, as its value is tied to many factors beyond your control — market conditions, acquisition or IPO timing, or even regulatory changes.