Flipkart’s recent announcement had everyone sit up and take notice.
For the first time, an Indian startup had announced a corpus of $100 million (Rs 650.57 crore) to buy back shares from close to 6000 current and former employees. This got India’s largest e-commerce company brownie points for helping its employees realise the value of employee stock options (ESOPs) in the fourth and the most significant buyback event since 2013. The inclusion of former employees possibly turned their peers green with envy.
Other members of the Indian ‘unicorn’ club are now breaking into a sweat. Peers such as Quikr (incorporated in 2005), Zomato (2008) and Ola (2010), among others, need to step up.
Anyone who works for, or has worked, in a startup would know that ESOPs are treated with caution. No buyback or liquidation events in the form of IPO for the new age companies is a deterrent for potential employees. “I was distraught when we would go out to hire engineering graduates in 2010 who did not factor in the 15% ESOPs component while making a decision about joining the company,” says Mekin Maheshwari, former head of HR at Flipkart who believes that the company’s ESOPs have been the best move towards hiring talent from the Valley and marquee businesses in the recent times.
Things might have changed for Flipkart and a few others, but as a part of the startup workforce, employees must be prepared for the risk. The promise of owning shares at a future date in the company they are helping build gives employees a sense of ownership and value. When it comes to realising the value of these stocks though…that’s where the bottleneck is.
Who gets ESOPs in a startup? Depends on the rank and the valuation of the company. Companies the scale of Flipkart offer ESOPs to entry-level engineers, till CXO level hires.
“The practice of granting ESOPs as part of employee compensation has become immensely popular amongst start-ups in the last few years. ESOPs essentially allow cash-crunched start-ups to substitute a part of the employee’s salary with an opportunity to own a stake in the growth and success of the organisation. Being great retention tools, ESOPs are typically granted to key employees and the options vest in the employees during the course of their employment,” says Veena Gopalakrishnan, senior employment lawyer at AZB & Partners at Bengaluru.
ESOPs are typically issued from a pool of shares set aside by the company from its total shares. The industry average is up to 5% though it depends on the company. All ESOPs have a cliff of one year at least, following which employees earn the right to ‘vest’ their ESOPs, a portion at a time. In case of Flipkart, the vesting period is four years with 25% of the ESOPs which can be vested every year.