A new breed of millionaires is in town to tell its own success story. We have seen the NASDAQ listing of Freshworks in September that created nearly 500 crorepatis, Zomato’s debut on the bourses in July and the recent IPO of Paytm that created nearly 350 millionaires. Quite a few employees in the start-up world are raking in the moolah. All thanks to their Employees’ Stock Options (ESOPs) that they had been holding for years. Many more companies are headed for the equity market. A windfall gain is good news, but it’s vital that the money is made good use of. Should you buy a fancy vehicle, repay your housing loan first, invest in a mutual fund or buy a few Bitcoins?
Understand your ESOPs
Stock options come with different vesting periods – the period during which the employee is allowed to buy the options).
You need to consider the exercise periods (the period within which the employee invokes the right to buy the shares) and the lock-in periods they are subjected to.
Later, when your company gets listed, you can’t instantly cash out your entire stock. “This is just paper wealth; unless you sell your shares, you do not get the cash in hand,” says Varun Girilal, Chief Wealth Officer, Scripbox. He says that very few employees understand the value of their ESOPs. That apart, how many shares you can actually sell on listing day and your overall lock-in period must also be understood. Meanwhile, stock prices can oscillate wildly after listing.
Paytm shares fell 27 percent on listing day, making it the biggest loser among Initial Public Offers (IPO) listed in a decade. Freshworks’ stock price on the NASDAQ is down 19 percent since its stellar listing.
Girilal points out that ESOPs are taxed, both at the stage at which they are exercised (when employees get them in the demat account from the company, directly) and at the time when they sell them in the market. Employees may have got their ESOPs at a huge discount, but they have to pay tax on the difference between the fair market value on the date of exercise and the exercise price.
ESOPs entail understanding the nitty gritty before you actually see the cash in hand.
Draw up a solid investment plan
Alok Saigal, President and Head – Private Wealth at Edelweiss Private Wealth, says that some of these employees may have become millionaires, but “all their wealth still lies in a single stock!”
Saigal recommends holding a diversified portfolio across various asset classes and even within each asset class, a basket of companies or securities. “People wouldn’t have seen their share price go up from Re1 to Rs 75 when their companies were privately held, but when your stock gets listed, a fall from, say Rs 100 to Rs 75, in the stock market hurts because you see that fall,” says Saigal.
Many wealth advisors say that employees at startups are inherently risk-taking. Shaji Kumar Devakar, executive director at IIFL Wealth says the fact that these employees had joined a startup all those years ago when their companies were next-to-nothing shows up in the way they would normally choose their investments. This, he adds, needs to be toned down. “A diversified portfolio consisting of equities (both Indian and international), debt instruments (ranging from highest-safety AAA-rated securities to credit-risk instruments, depending on a person’s risk profile), some allocation to gold (through sovereign gold bonds and exchange-traded funds) and real-estate investment trusts is what we broadly recommend,” says Devakar. He points out that every asset class is cyclical. An all-weather diversified portfolio is therefore crucial.
Also read: MC30: Moneycontrol’s curated list of 30 investment-worthy and best mutual funds
The lure of cryptocurrencies
Most wealth advisors strongly suggest avoiding cryptocurrencies. Saigal says: “We do not advise any of our clients to invest in cryptocurrencies, because they are yet unregulated in India.
But if you still want to go ahead and buy coins, then keep only a small portion for it.” Saigal suggests a core and satellite approach; keep rock solid investments as part of your core portfolio and a smaller, higher-risk thematic or sector-specific portfolio. Saigal says that cryptocurrencies can be part of your satellite portfolio.
Also read: Millennials and cryptocurrencies: A story of missed profits, hard lessons and losses
Seek a financial advisor
Financial planners say that most of the employees who hit the jackpot in recent IPOs are techies and know little about finance. The rise of cryptocurrencies and the huge surge in equity markets in the last year-and-a-half have only added to the noise. Here’s where a financial advisor helps.
Chennai-based Shyam Sekhar, Chief ideator, ithought Advisory, says that the being in the technology domain, many startup employees feel that technology can solve all their problems. They get drawn towards online brokerages, he says, where they can open their trading accounts and start stock trading. “But democratization of investing doesn’t necessarily open doors of success. People can make wrong choices if they do not understand investments,” says Sekhar who calls it the Google culture. It is all about searching about investments and hot tips on the internet, and then investing in them.
Seek out a financial planner, instead. Planners help you identify your life goals and map your wealth with your goals. A guiding hand helps here. Many advisors, like Sekhar charge advisory fees and invest in low-cost, direct plans of mutual funds. Those advisors who charge a fee may work better for you as their fees are aligned to how your wealth fluctuates.
Make a Will
Where there is wealth, there needs to be a Will. Make a Will
. Girilal suggests involving your spouse when drawing up your estate plan. In June 2021, SEBI relaxed the norms for vesting period of one year in case of a death of an employee who had ESOPs. These benefits are to be paid to the legal heir or the nominee. A Will helps you distribute wealth the way you wish to.