Esop Chronicles: Unveiling Startup Inc’s IPO Journey and Its Hidden Fable
Startups often turn to Employee Stock Ownership Plans (ESOPs) as a way to encourage ambitious individuals to take the leap into the exciting yet unpredictable world of new-age companies.
ESOP buybacks
While the figures for 2024 highlight the stock options available at IPO time, they don’t tell the whole story of wealth generated throughout the company’s journey. In fact, many startups actively buy back ESOPs during funding rounds, benefiting their teams in the process.
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In many instances, founders also cash in on partial stakes through secondary share sales, further widening the gap.
“Take a look at the numbers, and the disproportionate wealth becomes glaringly apparent,” states an industry expert. “It’s concerning when a significant portion of ESOPs is concentrated among a select few, leaving the majority in the lurch. Companies need to address this imbalance.”
IPOs and Wealth Creation
This year witnessed the public debut of food and grocery delivery giant Swiggy, which allocated 7.01% of its shares to employees via outstanding options, while its founders retained 8.68%. Meanwhile, e-commerce solution provider Unicommerce granted 10.16% of its ESOP pool at the time of its IPO, which was slightly overshadowed by its promoters’ 10.75% stake. It’s worth noting that the founders of Unicommerce secured their stakes through secondary transactions, highlighting the multi-faceted nature of startup funding.
Outstanding options represent the total number of stock options that have been granted but not yet exercised or expired—a critical piece in the wealth creation puzzle.
Earlier reports indicated that Swiggy’s IPO put an astonishing ₹9,000 crore of ESOP wealth in the hands of over 5,000 employees, including founders and top execs. That’s right—a staggering amount for one of the largest wealth generation events by an Indian startup, creating 70 new dollar millionaires!
Consider Ola Electric, where founder Bhavish Aggarwal held nearly 37% of the company, while employees had a mere 3.5% in the outstanding ESOP pool. The company’s employee trust claimed an additional 7.7% at the time of its IPO in August.
Most startups offer a four-year vesting period for stock options, meaning employees must wait until they can convert their options into tradable shares. But is this model still fair?
“That’s the question we need to address,” says a leading industry analyst. “With Indian startups taking a decade or more to mature, shouldn’t we consider revising the traditional four-year ESOP structure? Investors might want to rethink their funding timelines while employees should focus on long-term career growth rather than chasing quick wins.”
Despite attempts to reach out, many companies, including Ola Electric and Swiggy, remained tight-lipped about the matter.
Blackbuck’s CEO pointed out that their ESOP pool amounted to 5.2% of overall shares, showing that there’s room for improvement across the board.
Unicommerce’s CEO emphasized the importance of ESOPs for retaining talent and fostering growth, a sentiment echoed throughout the tech industry.
The ESOP Effect
The rise of ESOPs in India can be traced back to pioneering software firms like Infosys. They introduced this innovative compensation tool, which has now become essential for startups trying to retain top talent and ensuring that founders remain motivated as companies scale up.
Even though legacy IT services have seen similar disparities, founders have retained higher stakes since they didn’t have to dilute their holdings to attract outside capital. The wealth divide isn’t just an ESOP issue; it also extends to salary disparities between management and junior staff in the tech space.
Throughout India’s burgeoning internet economy, Flipkart has emerged as a titan of wealth creation, with approximately $1.5 billion in ESOP buybacks over the past few years—solidifying its status as a leader in the field.
Look at Zomato, one of the first major homegrown internet startups to go public, which generated 18 millionaires through its ₹9,375 crore IPO in July 2021. And when Paytm made its grand entrance into the public markets in late 2021, around 350 employees became crorepatis—talk about life-changing wealth!
Industry experts predict that the gap between founder equity and ESOP pools will continue to widen as companies transition to public markets. This is largely due to the stock options allocated to founders during the pre-IPO phase, while employee ESOP pools remain static. “The delta will only grow,” one analyst explained.
The opportunity for wealth creation through ESOPs has ripple effects, inspiring senior employees to consider launching their own startups—a trend that’s gaining traction across India’s vibrant startup scene.
