As startup story goes awry, Esops lose their sheen

BY SREERADHA BASU, ET BUREAU | JUN 08, 2017, 06.30 AM IST

MUMBAI: Employee stock option plans (Esops) are so yesterday — so much so that almost no high-flyer recruit in ecommerce now wants them. Once the ultimate wealth-creation vehicle, and part of the startup lore, Esops have lost their sheen along with the startup story. 

Headhunters say executives are negotiating hard to keep the Esop component of their salary at the minimum. A senior executive recently selected by an etailing company as its CFO was offered a Rs 5 crore package, 60% of  it as Esops. The candidate joined only after the fixed salary component was raised to 60%, and the balance 40% split between performance-related variable pay and Esops. A COO candidate at a venture capital-backed startup in Hyderabad declined the offer because the compensation package was heavy in Esops and the company was not in a position to offer more cash. 

Top search firms such as Heidrick & Struggles, RGF Executive Search, Transearch, The Taplow Group and Antal International say they are seeing more and more candidates negotiating against high Esop components in their salary. 

“There has been a lot of scepticism around the real value of an Esop award,” says Anandorup Ghose, partner, HR consultancy Aon Hewitt India. “There has hardly been any prominent listing in this segment over the past few years, and the real upside potential from an Esop programme in early stage companies comes from an IPO. That is raising doubts in employee minds. 

Secondly, there has been a lot of froth in past few years over perceived valuation of companies. Most companies today have gone through downrounds, so the excitement of significant value growth has also gone,” he adds. 

The Snapdeal story is making everyone even more Esop-wary. As ET reported in its edition dated May 26, the troubled ecommerce company’s  former employees have asked the management questions about the real worth of their Esops.Snapdeal is being sold to Flipkart at a steep discount and investors will get the first preference on payouts from sale proceeds. This liquidation preference clause will heavily impact the stock option pool, estimated at $260 million in 2016. Even current employees have little clarity on what their Esops will be worth post the sale. 

Joseph Devasia, managing director, Antal International India, cites the example of a senior executive at an ecommerce major who decided to forfeit some Rs 15 lakh of Esops due to vest in December, and instead went on to head online sales at a large consumer business player. “He didn’t believe in Esops. The new company gave him a 30% hike and he felt it would be a safer option.” 

“Esops are no longer the ‘assured win lottery ticket’ they used to be,” says Vikram Bhardwaj, CEO of Redileon Partners. 

Bhardwaj says during boom times, employees would take employers’ promises on Esops at face value. But now there’s a lot more  scepticism. Headhunters say employees now understand fully that stock options are nothing but the right to purchase common stock in the company. 

Since Esops come after preferred stock, they get less priority than investors’ or debtors’ rights/claims.