Fables of ESOP — The Movement is March-ing Along!
Startups offer a great leverage to its employees. It’s as if one is put on steroids and everything around seems like playing that YouTube video on 2x mode! Having joined one recently, I must admit that I am still acclimatising myself to this faster-new-normal :)
In growth startups, one gets leverage in terms of learning, opportunities and career progression.
Everyone loves a good startup stint on your resume these days — even better if they hear it from others. They serve a great option for one to fast-track one’s career. Experience and titles on paper are soon becoming irrelevant, while ability to learn and execution on ground is what matters and what founders look for. Given the paramount role of a cohesive team to launch the founder’s rocket-ship to the next orbital — do you think this awesome team also has opportunities to unlock value for themselves along with the founders and investors? While the answer would have been not so obvious until a couple of years back, it’s definitely changing for the better. Let’s analyse this.
Welcome to the ‘Best-Time-To-Work-For-Startups Age’ in India
It’s spring time for startups in India and the best time to work in one. Finally startups are qualifying the ‘neighbourhood-aunty test’ which basically summarises the reaction of your neighbourhood aunty when you respond to the ‘kya karte ho aajkal beta’ (roughly translating to; what do you do these days, son)? question :)
Working for startups is now cool. Startup hiring from college campuses will soon cross 50% mark (vs. traditional corporates/PSU etc. My optimistic guess is within the next 3–4 years!).
Startup salaries even at earlier stages are quite attractive and a lot of this is due to higher seed-round cheques that founders are raising.
But what about non-linear wealth generation which was an exclusive domain of founders and investors? Well that’s changing too — thanks to democratisation of ESOP Schemes — Employee Stock Ownership Plan.
ESOPs — The Slow Transition from a Lottery Ticket to a Coveted Asset
ESOPs are instruments to allow employees to buy shares in one’s company over a period of time and at a determined price. Read our primer on ESOPs to understand the terminologies and best practices.
Until sometime back, ESOPs were like those ‘conditions applied’ to your insurance plan or the coupon you got as a +1 on purchase of a product.
It was not talked about a lot, not given enough importance and treated as a lottery ticket you are buying with open, indefinite draw date in those compensation conversations with HR. Well I can safely say it’s no longer the case. Both employees and employers at startups are much more aware now of the possibility of the real value ESOPs could accrue to employees. Thanks to the several happenings in our vibrant ecosystem in the last few months.
I see two broad aspects that are critical to making a great ESOP plan signalling founder-intent to share wealth creation with employees — one is a favourable structure (in terms of strike price, exercise period & cash-ESOP optionality) and second is predictable liquidity (though buyback/liquidity programs) and it’s great to see startup ecosystem and especially founders waking up to this need to offer good ESOP plans to their employees. Here’s a quick round-up of happenings in March 2021.
ESOP Roundup of March 2021
- RazorPay announced its 3rd ESOP liquidity program putting itself in the an elite league of startups that offered 3 or more buyback programs. The pool size is also quite huge ($10m) which is a rather larger portion (10%) of their last Series-D fundraise. Perhaps indicative of a larger investment in the offing? Also they have turned cashflow positive last FY indicating a larger muscle to offer larger buyback pools. My sense reading the news also is that this is a secondary sale vs. a company buyback by its investors — Sequoia and GIC.
- Zetwerk too announced a largish pool ($8.3m) for ESOP buyback post closing their $120m Series-D. This is very significant as it’s just a 3 year old company. The pool amounts to 7% of the investment raised
- Cashify recently announced a $1m buyback program, again amounting close to 7% of the recent Series-D round they raised ($15m).
These startups join the league of over a dozen startups that have offered similar programs to their employees in the last 6 months which to me is a very heartening sign. I say this for the below reasons:
- Founders are realising the importance to share wealth with their ‘warriors-in-crime’ without whom they can’t imagine winning their battles. Hence they are creating favourable schemes and pushing to offer liquidity more frequently
- Investors are open to considering a small chunk of their investment for employee liquidity programs as it helps signal their investees as meritocratic, wealth-sharing startups to attract the best talent.
- Startups are leveraging this actively for good PR — BharatPe, Bijak, Licious, Urban Company, Cred, Shadowfax, Meesho among many others, which is helping the ecosystem gravitate towards this new normal as other startups will soon start feeling the FOMO and their CHROs would be in significant pressure to check this box :)
In other news:
- BharatPe launched an ‘ESOP Fantasy League’ creating a simple ESOP value generation calculator if you allocate a part or your full increment in ESOPs rather than taking cash. A cool hack to gather eyeballs I would say :). Also they heralded the slogan — ‘Ab Sab Malik’ and the fact that they have liquidated 100% of vested ESOPs so far — Great message to attract people
- Bijak launched an ESOP plan as well. They raised a Series A round of $12m last year with RTP Global and existing investors — Sequoia, Omidyar, Omnivore etc.
- Apart from this, Ritesh Banglani of Stellaris Venture Partners wrote a scathing article calling out bad behaviour from founders with regard to ESOPs in the past which reverses the good deeds of several other startups and poses consequences for the ecosystem. I think it was a very relevant and a timely article underlining the need to offer fair ESOP schemes to employees.
- In this context, Shantanu Deshpande, CEO of Bombay Shaving Company (BSC), too wrote a beautiful LinkedIn post & shared best practices to founders while structuring ESOPs from his experience at BSC. That one post has led to an engagement with perhaps 100+ other founders and perhaps sensitized them of what’s fair and employee-friendly and what is not. I suspect many founders might not have given much importance to ESOP plans considering them a pure HR decision? Maybe such conversations will help underling importance of ESOP schemes.
In conclusion, I started this blog saying startups offer a great leverage to its employees. And I’ll end by saying:
Employees offer an even bigger leverage to startups.
As all it takes is a great team and you shall move the earth! :) Welcome to the new normal folks.
PS: Time for some self-marketing. I work for Qapita. We are an early stage fintech startup. We build SaaS solutions to manage Captables and ESOPs for startups — organising transactions, DD-readiness, running future dilution/exit scenarios, managing ESOP creation/administration completely digitally. We are also building products for startups to issue digital shares and manage liquidity programs for ESOP holders and early investors.
In case you are looking for a solution to manage captables, ESOPs, digital shares or ESOP liquidity programs do hit me up: srikanth@qapitacorp.com
Connected with me: LinkedIn; Twitter (@PrabhuKeDarshan)
