Working for promising and fast-growing startups can be rewarding, but also risky and full of stress. Competitive salaries and energetic work environments can ease some of that, but the ultimate proverbial pot of gold at the end of the rainbow is cashing out by selling the company’s shares when it goes public.
But more and more startups are content with staying private for much longer periods, thanks to the unprecedented rise in the quantum of private capital on offer. For instance, Flipkart alone has raised over $7 billion in venture funding till date, in comparison with Infosys, which raised under $5 million in its 1992 IPO.
So, the IPO pot of gold has gradually been replaced by the “secondary sale” pot of gold. Instead of a “primary” sale of shares, wherein a company issues new shares to investors in return for their capital, a secondary share sale involves existing shareholders selling their shares to other private buyers. The buyers could be existing investors or newer parties, or sometimes even the company itself.
But the money flows into the accounts of the seller, not the company’s accounts. And the flow of this secondary money has very slowly started to swell.
The Taxi For Sure mafia* paid out handsome bonuses to senior executives selling their shares in the company, after its merger with Ola in 2015. This allowed the executives to set up companies of their own. More recently, there’s the sale of over Rs 100 crore worth of shares from Employee Stock Options (ESOPs) in digital wallet company Paytm*. Fifty-six Paytm employees sold a part of their shares to One97 ESOP Trust. The trust went on to transfer these 1,64,186 shares to Alipay Singapore E-commerce as part of a secondary sale. A joint analysis by investor research platform Paper.vc and The Ken indicates that the trust mediated the secondary sale, thereby easing the paperwork.
Capillary Technologies, founded in 2008, has bought back over $3.5 million worth of shares through two buyback events coinciding with the company’s fundraise in 2013 and 2015. During buybacks, a company allows employees to sell a part of their shares for a pre-decided price.
Aneesh Reddy, CEO of Capillary says, “We typically set aside a portion of the secondary allotment as an ESOP buyback pool and use that for buybacks.”
But ESOP buybacks have been few and far.
Coupled with the high valuation of the Indian startups, and investor interest piquing in the last 18-24 months, the market for secondary sale of employee shares is growing. But the growth comes with strings attached, controlled by the company and the board, with the blessings of existing regulations in India.
So, it is not surprising that questions about making money from secondary shares remain. Why is it so difficult to sell shares on the secondary market? Why is it illegal to sell on the open market?