At 70, when Ashok Soota decided to start over again as an entrepreneur, having worked in fabled wealth creation companies like Wipro Limited and Mindtree Limited, he had some ideas. Specifically around granting stock options to employees. With Happiest Minds Technologies (started in 2011), an IT consulting and services company, he envisioned a venture where employees were committed to building it up right until the Initial Public Offering (IPO). At Mindtree, where he led the consulting firm along with nine other co-founders for 12 years, Soota learned that commitment from employees calls for water-tight incentives and clear terms of reward. With Happiest Minds, he was careful to chalk it out right at the start.
“In the previous company (Mindtree) we realised that you issue Employee Stock Options Plans (ESOPs) to employees and they walk away. That way you lose both the shares and the talent. You might not have enough stocks to allocate to a new hire who will replace this person,” says Raja Shanmugam, chief people officer at Happiest Minds who worked with Soota in Mindtree. From being the chief executive officer at the non-profit arm, Mindtree Foundation, Happiest Minds is Shanmugam’s first stint as a CPO.
He says that the company made it clear to its employees from day one that it will go public in the next seven years. In case an employee wants to walk away before that, she has to sell her vested shares back to the company and can benefit from the appreciation in share price during her employment. The grant letter also says that failing an IPO in seven years, employees can retain vested shares in the company till it goes public, as a reward for contributing to the growth of the organisation.
This is just one of the ways in which a grant letter for ESOP can be framed with necessary details to safeguard the interests of the company.
ESOP structures in the Indian startup ecosystem are often an afterthought as founders are focused on making the core product market ready. Structured plans for employee stock options are brought to the table usually by institutional investors when they come onboard. With Happiest Minds, which raised $45 million from external investors within months of inception, the funding set the pace.
Private companies in India, however, can go on till Series B round without a clear ESOP structure in place. In that period, which could be anywhere from two to five years since the inception of the company, founders end up overlooking key issues in ESOP distribution.
Different strokes of ESOP
According to tax and law experts, the stringent laws under the Companies Act make the Indian ESOP structure far more complicated than those in the US or Singapore, and so, these countries are preferred by large companies for registration. For example, rewarding founders and promoters with ESOPs is common in these countries but Indian laws forbid issuing ESOPs to promoters or anyone holding more than 10% equity in the company.
