With the recent IPO flurry among Indian start-ups, the employees of many new-age companies are availing an ESOP (Employee Stock Option Plan) windfall in the run-up to their IPO listings.
To capture this significant change, CNBC Awaaz brings together TN Hari, Head HR of BigBasket; Sanjay Jha, co-founder of LetsVenture and MyStartupEquity; and Chitbhanu Nagri, Sr. VP People Operations RazorPay in a conversation with host, Harshada Sawant.
In this interview, experts decode the growing trend of ESOPs in India, the process of granting ESOPs, and the information shareholders should have before receiving them and accessing the benefits. Excerpts of the interview, edited for clarity, are as follows:
Harshada: Over the last two years, we have noticed start-ups increasingly reward their employees with stock options. Is it a part of the growing start-up ecosystem or does the trend capture the need of the hour?
Hari: Depending on whether it’s a bootstrapped and profitable start-up or a large company, the ESOP pool size can be anywhere around 5-25%. With time, as companies unlock value or run up to IPOs, it is imperative to reward employees with share ownership. It makes sense for start-ups to broaden their pool size pre-IPO to include employees in the profit-sharing growth.
Read more about ESOP pools here.
Harshada: With soaring valuations of a company, we notice significant gains for employers and investors. Now that we are bringing employees into the picture, do you feel it is a seismic shift in the start-up ecosystem?
Sanjay: Yes, Harshada. In the last couple of years, we have noticed big start-ups going for ESOP buybacks to remunerate employees and help liquidate their shares. I also agree with Hari in increasing the ESOP pool size with successive funding rounds. This can be beneficial in future hiring, also to attract and reward new talent.
Read more on the ESOP buyback trend in India here.
Harshada: So, Chitbhanu, RazorPay had facilitated ESOP buyback twice in the past. I’d like to know more about your ESOP policy since a lot of start-ups today are including junior and administrative staff, were earlier limited to senior management. How has RazorPay’s policy benefited employees?
Chitbhanu: Given the advancement in the technology ecosystem and ESOP policies, I think organizations like RazorPay had realised the importance of employees early on. We included a major chunk of our team for the ESOP pool as a part of the company’s profitability. We have also successfully accomplished liquidation programs for current as well as former employees. RazorPay has always believed in acknowledging a larger ecosystem that contributes to a startup’s success, by rewarding employees.
Harshada: Since every employee partakes in the making of a successful company, we notice a unique trend in the gig economy as companies like Unacademy are in talks of reserving a bigger ESOP pool for their educators. Going by the trend, food companies like Zomato and Swiggy might reward their food delivery partners with ESOPs. Hari, what are your thoughts on this?
Hari: The way I see it, there are two major purposes of stock options – retention of employees and rewarding them.
What companies like Unacademy and alike are going for is to highlight symbolism versus authenticity. While rewarding a long-time educator honours his loyalty and service to the company, it might not serve the purpose of retention.
The way stock markets behave, and with the expansion of company valuations, the monetisation of the ESOPs can exceed the employee’s actual remuneration.
I believe including food delivery partners, field staff, or educators in the ESOP pool could end up diluting the employee and investor stake, while neither retaining nor rewarding employees.
Harshada: In the process of a company’s expansion of its ESOP pool, what happens when the stock market goes down or there is a devaluation?
Sanjay: People are increasingly investing in the stock market with a hope to increase their capital. Similarly in a start-up, employees make use of ESOPs to be a part of the company’s growth story and create wealth.
The way I see it, the risk vs reward ratio with people holding individual stocks is no different than ESOPs. To counter this, founders can plan alternative liquidity events or cash-out opportunities when things go downhill.
Harshada: Chitbhanu, what are your thoughts on this since most employees in the start-up ecosystem are not so well versed with ESOPs?
Chitbhanu: From my perspective, stock options are directly correlated to a company’s long-term growth. Be it stock markets or private markets, there will always be short-term downtrends. A company showcasing strong leadership, foundational strengths, and a transparent business model will be profitable in the long run. This is more evident with the successful IPO of Zomato.
Harshada: Hari, what about the vesting period when it comes to feasibility?
I think the vesting period of four years is fair enough.
Some companies have a slab of 25% in the first year, and the remaining 75% in uniform vesting over the next 12 quarters, which makes sense for shareholders.
I believe companies and organisations should be fair in their dealings with the vesting schedule in their company agreement.
Harshada: What should employees know about ESOPs while getting on board with a company?
Chitbhanu: I think employees should understand the big picture before signing up for ESOPs; the philosophy behind the ESOP policy and company growth. New employees should understand the terms and conditions and ask for ESOP documentation, say, to evaluate the accelerated vesting during a merger or acquisition. I’d also suggest they look beyond compensation and take a holistic view to understand the company culture.
Understand the concept of accelerated vesting here.
Harshada: Sanjay, how do you suggest educating employees on ESOPs?
Sanjay: At MyStartupEquity, we assist individuals in understanding and navigating through the ESOP lifecycle with the help of blog posts and videos. After getting a grasp, they should look for three important concerns – vesting schedule, exercise price, and exercise period during encashment in liquidity events.
Watch the full interview here.