Data compiled by Longhouse Consulting exclusively for ET highlights the gap in wealth creation between startup founders and their overall staff.
Startups typically issue Esops (employee stock ownership plans) as a tool to incentivise people to take the risk of joining fledgling startups.
Esop buybacks
While the data set for 2024 accounts for outstanding stock options mentioned in the companies’ initial public offering (IPO) prospectuses at the time of going public, these do not represent the entire wealth generation facilitated by the firms over their entire life cycle. Typically, privately held startups conduct Esop buybacks while raising funding to award their staff.
In several cases, founders also encash partial stakes through secondary share sales.“When you look at the numbers in absolute amounts, the disproportionality strikes you,” said Amit Tandon, founder and managing director of proxy advisory firm Institutional Investor Advisory Services (IIAS). “There are instances where a large part of Esops go to a very narrow set of people, and only a small part is distributed among the larger set. That is something the companies need to guard against.”IPOs and wealth creation
This year, food and grocery delivery firm Swiggy, which went public in November, allocated 7.01% of its shareholding to outstanding options for employees, while its founders held options and equity totalling 8.68%.
Similarly, ecommerce software firm Unicommerce’s outstanding Esop pool had 10.16% shares at the time of the company’s IPO, and its promoter holding was at 10.75%. To be sure, the firm’s promoters including ecommerce marketplace Snapdeal and its founders Kunal Bahl and Rohit Bansal acquired stake in Unicommerce through secondary transactions.
Outstanding options refer to the total number of stock options that have been granted, but not yet exercised or expired, within a company’s capital structure.
ET had reported in November that Swiggy’s public listing unlocked Rs 9,000 crore in Esop wealth for its over 5,000 past and present staff. This included the founders and its senior management. Swiggy’s $1.4-billion IPO, which was one of the largest wealth creation exercises by an Indian startup, also minted 70 dollar millionaires.
For electric two-wheeler maker Ola Electric, founder Bhavish Aggarwal’s holding was nearly 37% versus a 3.5% outstanding Esop pool for the firm’s employees. The Bangalore-based company’s employee trust held another 7.7% stake at the time of its public issue in August this year.
Most companies offer a four-year vesting period to employees—the stock options agreed upon at the time of joining of an employee turn into tradable shares at the end of this period.
“The question arises whether the four-year Esop playbook is fair or not,” Anshuman Das, CEO of Longhouse Consulting, said. “Companies are taking at least 10-12 years to get built in India… Investors should possibly think about having longer fund cycles, leaving more for the founders and employees… The employees should also aim to stay longer versus making a quick buck within four years,” he added.
Mails and messages sent to Go Digit, Ola Electric, Swiggy, Firstcry, Ixigo and Awfis did not elicit a response till press time Thursday.
Blackbuck founder and CEO Rajesh Yabaji said the company’s Esop pool, including granted and exercised options, stood at 5.2% of the overall shareholding.
Unicommerce CEO Kapil Makhija said in response to a query, “It has become important for technology companies to leverage Esops as an instrument for talent retention and progression.”
ETtechEsop effect
Esop allocations gained traction in India when software services firms like Infosys began deploying them. Companies grant additional stock options to founders and key management personnel ahead of a public listing to ensure they continue pushing for better performance.
While the disparity between employee wealth pool and founder or promoter wealth was also high for legacy IT services companies, the founder shares ended up being high because they did not dilute high quantum of stakes to raise external capital.
In addition to the difference in stock wealth for employees and promoters, IT companies have also been flagged for disparity in payouts to their top management and junior staff members.
Over the past decade of India’s internet economy, Walmart-owned ecommerce marketplace Flipkart has emerged among the biggest wealth creators, having conducted Esop buybacks aggregating to $1.5 billion across various tranches in the past six to seven years.
Zomato, which was one of the first large domestic consumer internet startups to go public in July 2021, created 18 dollar millionaires through its Rs 9,375 crore IPO. At the time of Paytm’s IPO in November 2021, around 350 employees (both existing and former) became crorepatis.
Das of Longhouse Consulting pointed out that the gap between founder equity and Esop pools will typically increase as companies tap the public markets, given that founders are allocated stock options in preparation of a listing. “There will be no difference between private and public companies (in terms of the delta between founder equity and employee Esops)… but the founder’s equity is increased (while) Esop pool will not change. So, from that point of view, the gap between the founder and Esop will increase,” he said.
The wealth creation opportunity through Esops also tends to have second-order effects with senior employees building a capital comfort to potentially start up on their own, a trend that’s unfolded across the Indian startup ecosystem.
