Startups dangle new employee stock option plans to woo talent

Surging demand for digital skills and a section of workers dropping out of the workforce during the pandemic has caused an acute skills shortage, especially in the tech industry, driving up salaries and forcing startups to part with their most valuable currency—stocks—to retain employees.

Startups are outdoing each other to retain employees. Online meat seller Licious, for instance, announced last week that all eligible employees could liquidate their Esops any time after a one-year lock-in—no questions asked.

Earlier this month, edtech startup Teachmint introduced a similar Esop liquidity plan, while fintech startup BharatPe went a step ahead to offer $100 million worth of shares to its merchant partners, giving a key stakeholder the option to benefit from the company’s growth. In July, edtech startup Unacademy offered fully vested stock options to teachers on its platform.

Allotment of Esops is also becoming more democratic. Last month, social commerce startup Meesho opened up its Esop scheme to employees. They can now opt to convert as much as 25% of their annual salary into Esops. Fintech startup Cred did the same a month earlier, allowing employees who had completed a year at the startup to take half of their annual cash compensation in the form of ‘special grant Esops’—which would vest after a year.

There has been a paradigm shift, said Shabnam Shaikh, partner at Khaitan & Co., referring to the recent startup Esop policies. “Earlier, stock options would have been an incentive to an employee at the time of liquidity event—like an IPO or an exit by promoters,” she said, adding that startups now are actively finding ways to accelerate these liquidity events by creating buyback pools. “If there is a long gestation period between vesting and a liquidity event and the company is self-sufficient, the funds of the company are used to cash out the options and give a ‘bonus’ to the employees,” she added.

Some of these moves signal a measure of generosity that did not exist in the startup ecosystem until recently and is a manifestation of the funding boom and skills shortage, legal and human resources experts said. The fact is that the funding boom in the country has put a lot of money in the hands of founders and has turned 39 Indian startups into unicorns in 2021, compared to just 11 in the whole of last year.

Traditionally, startups structured their Esops such that shares are allotted to employees at the time of a liquidity event. This is done because issuing shares comes with voting rights, complicating decision-making and future funding rounds. “There are cases when shares are allotted as and when the options get vested. However, these shares will be subject to transferability restrictions and clawback if the employee leaves before the intended liquidity event,” Khaitan’s Shaikh said.

Buoyed by their fundraising, many startups, including PhonePe, Cred, Meesho, Licious, Moglix, Flipkart, UpGrad, BrowserStack, Zetwerk, Acko, Razorpay and Unacademy, have put in place buyback schemes this year.

Esops and buybacks are also a great recruitment tool, according to startups.

According to Vivek Gupta, co-founder of Licious, he would earlier meet many people who did not believe in Esops because they were “cheated”. “But Esops are no longer just a paper asset,” he asserted. Licious allows Esops to vest on a pro-rata basis throughout the year instead of making it a quarterly or an annual vesting event. Licious employees can also encash their Esop shares at any point, the company said when it introduced the plan this month.

Gupta said Licious’ Esop policy was an attempt to make the framework more democratic and transparent as buyback schemes have historically been implemented only when the company has wanted to do it. “So, if you have shares vested up to yesterday, you can sell it today. If you are leaving the company and you don’t know what happens to your shares, you can take cash and go home,” Gupta said.

He hoped this would change their hiring process. “Next time I am hiring a person, that person may himself say—‘don’t give me only cash; give me a combination of stock and cash’,” Gupta said.

Licious wants to completely automate the process wherein employees can immediately redeem their options. Gupta also expects Esop shares to be more liquid and transparently traded among existing and new investors in future.

For startup employees, though, the Esop boom also hinges on startup valuations continuing to grow.

“Everyone is being smarter and more creative with Esops now in light of the talent war going on in the tech startup ecosystem. The rising valuation in the startup ecosystem is also helping. But will founders be able to afford to do this forever?” asks Rituparna Chakravorty, co-founder and executive vice-president of Team Lease.

“As long as the pie continues to grow, why will founders have a problem,” Gupta said.