Esops-The great reluctance to cash out

Understanding the Risks of Employee Stock Options (Esops)

Esops are often touted as a great wealth creator, especially for employees who receive regular allotments, building a strong portfolio over time. However, it's essential to be aware of the potential risks associated with Esops, including:

• Concentration Risk: Holding a large portion of one company's shares in your portfolio can be hazardous, making it crucial to regularly review and adjust your Esop allocation.
• Anchoring Bias: The tendency to hold onto Esop shares, even when their value declines, can lead to significant losses, as investors often wait for the share price to recoup previous highs.
• Performance Gap: Many marquee companies have underperformed industry benchmarks, yet their Esop holders continue to see substantial returns in rupee terms, masking the reality of their investment performance.
• Company Performance: An employee's conviction in their company's success can lead to an increased risk of holding onto underperforming shares, even when the sector or company is experiencing difficulties.
• Holding onto Gains: The reluctance to sell Esop shares, even when they're doing well, can expose investors to significant risks, as prices may not always continue to rise.
• Counting Chickens Not Hatched: Employees holding startups' unlisted shares face significant risks, as their share values remain theoretical until a listing or stock dilution occurs.

In conclusion, it's essential to evaluate your Esop holdings and seek professional advice on retaining or selling shares, considering the potential risks involved. A reality check is necessary to avoid potential losses and ensure a well-diversified portfolio.