about half a dozen start up Those involved in the process told ET that founders whose companies are debuting on the stock market in 2021 are wooing their company’s board with additional stakes and other milestone-linked rewards so that they can “skin the game”. Keep it up He said the aim of the rising trend is “rewarding”. founders In firms where generally, investors have a much higher stake than entrepreneurs.

Policybazaar parent PB Fintech, which is listing According to the red herring prospectus, exchanges on Monday gave up to 10,657,500 fresh options to founder Yashish Dahiya, while cofounder Alok Bansal got 4,567,500 new options. Dahiya and Bansal hold 4.27% and 1.45% respectively in the firm, compared to SoftBank, which owns more than 15%.

ET reported last month that all five
The founders of PharmEasy were granted 9,987 stock options Before you file your draft initial public offering (ESOP) under your Employee Stock Ownership Plan (ESOP) (IPO) documents.

Board of IPO-Bound Logistics startup Delhivery has approved the grant of new stock options Its founders and senior leadership were fired three times this year, the latest in September, according to regulatory documents and its draft IPO paper. These grants are often performance- and time-based, with different vesting schedules, but it increases their stake in the company.

“The founders have been given long-term esops to continue leading the company over the next six to seven years. In some cases, the founders have even invested their money to show their confidence in the firm at the pre-IPO round valuation,” said one of the founders, who went public this year, explaining why the board granted new stock options. and awarded them a bonus To achieve certain milestones.

ET also reported in September that Paytm’s founder is Vijay Shekhar Sharma.
acquiring a significant amount of new stock options This will increase his stake by 2-3% in Paytm parent One97 Communications, which is scheduled to be listed on the exchange on November 18.

Similarly, Zomato’s founder Deepinder Goyal was also
About 70% of new stock options allocated As part of its 2021 Esop program before going public.

“Post listing, this has emerged as a key trend among tech startups to instil confidence in the company’s management,” those involved in the approval told ET.

He added that unlike the situation in US-based startups, most startups with multiple founders have low single-digit holdings in their firms by the time of the IPO. Sources said that without such an option, there is little incentive for an entrepreneur to continue his venture when the initial investors are making record profits through IPOs.

For founders who cannot sell their shares immediately, much of their net worth is on paper during the listing process.

inspiring belief

Experts believe that this growing trend is positive for the startup sector.

Siddharth Pai, founding partner at venture fund 3one4 Capital, pointed out that “compared to major US startups, where founders can be 30-40% in their company, (in India), it is in the single digits for early teens, it is in the single digits for this. Depends on whether it’s a single founder of multiple co-founders.”

“Apart from the promotion of new options and bonuses, it also increases their (founders’) stake in the company after the IPO and inspires confidence in the management,” he said. “The skin in the game and shareholder alignment are important to investors. It is a combination of factors that is at play, as founders now have to be accountable to analysts and public shareholders.”

Several industry executives involved in a company’s IPO plans said that several startups had plans to go public a few years back, but could not do so, and therefore had to reduce their holdings to raise capital to sustain operations. . “Now they (founders) have taken the company to such a level that everyone can get some exit and get good returns. I think investors are well connected with and need these approvals,” said a venture capital investor, who has seen at least two of his portfolio firms issue such options to founders.

Unlike the
Nykaa’s Falguni Nayar and Paytm’s Sharma, who is a sole founder, most of the entrepreneurs together held 10% or more stake at the time of IPO. “Most tech companies have a commitment to making profitable and creating more value. While public shareholder scrutiny will go on performance every quarter, they (the shareholders) must also acknowledge the commitment of the founding team,” said this person.

And it’s not just an IPO-bound company that is rewarding its top management – the Tata-owned BigBasket founders were given ‘MSOPs’ after the acquisition, as were
informed of by ET in September

“They (founders) are usually in the low single digits and this (new options) helps lift that up,” said Mohan Kumar, founder and managing partner, Avatar Ventures. “Once listed, they will have to maintain valuations, conduct quarter-on-quarter checks and expect to run the company without any glitches for the next three to four years. It’s a fair deal for the founders.”

Executives ET said there is no room for error going forward, and relatively poor performance in two to three quarters could lead to indecent investor reactions. “Earlier, it was just your board (being accountable), but not once it was public. The execution is expected to be flawless after raising money at a valuation higher than the private markets,” another senior industry executive told ET.

Pai said it’s important to have a founding team after an IPO, because if a founder leaves soon after listing, the price (of the stock) can crash and the company can have untold effects. “Founder changes, especially post-listing, put the company on a very precarious footing,” he said.

Another senior executive of one of the big startups in one of the biggest IPOs said the board itself had proposed allotting fresh stock options to the founders, as they had not taken any stock earlier. “It was agreed upon (unanimously),” he said.



global trends

This is also a global trend, with founders in Silicon Valley and other global markets receiving similar rewards for going public. In fact, founders of American tech companies often get a huge jump in their salary packages to take the company to the IPO stage, a recent Wall Street Journal report said. In India, most founders of top startups earn between Rs 1-3 crore per year, including variables.

All that said, some incentives and changes to the founders are also being made taking into account the possibility that some public investors may not agree to offer such rewards to the founders. According to Pai, shareholder activism is an imperative in tech companies and the founders will be examined in more depth on a quarterly basis.

“At those points, performance is the only thing that matters, and any further management incentives will be linked to performance and examined in depth,” he said.

One of the investors mentioned above said it was only a matter of time before some shareholders would be as active in tech companies as others. “It will. To what extent it works is for all of us to see in the next one to two years.”