Even if the former employees find a buyer, they’ll still need the approval of the board, as companies have the first right of refusal. The platform usually helps in doing the paperwork for the approval. This is the step where most trades fail.
Companies like Ola and OYO have tight control over this kind of share sale, as they don’t want competitors or current investors to increase their shareholding. Companies are also wary of the price at which the former employees are willing to sell. “If the price at which the shares trade here are lesser, companies feel it dilutes their reputation,” said Ginodia. As a result, most trades fall by the wayside.
NPT Private Equity’s Opportunity!
Startup fundraising platform LetsVenture launched a new business vertical, LetsVenture Plus, in May to address this problem. It aims to digitise data in private markets by providing a cap table and ESOP management software, along with a liquidity solution designed for ESOPs. Currently, about 20 startups in India, the US, and Singapore use the management software. The liquidity solution is in the pilot stage.
When investors come for a new round, companies want to use that money to grow the business. For companies to attract investors for secondaries, the stock needs to be much sought after. Companies can see secondary action only when investors are queuing up for stock and are ready to get it in any way possible.
Something like this could be the relief startup employees need. So far, the only fallback for cashing out has been secondaries, as IPOs and exits via mergers and acquisitions are few and far between.
Secondaries are celebrated events for employees in startups. Here, investors buy shares from founders, employees, or other angel investors, instead of buying it directly from the company.
In modern times, no Indian company has done this better than Flipkart. After its first secondary in 2013, it had one almost every other year, allowing current and former employees to cash out.
Even though there have been many unicorns after Flipkart, no other company could really follow up on its act of buybacks.
Companies are realising ESOPs mean nothing till they’ve had a secondary to talk about. Series C funded startups like payment gateway Razorpay have had two investor-led buybacks—in 2018 and 2019. And naturally, the scale is small. If Flipkart saw secondaries worth US$100 million, Razorpay’s is around US$2.5 million.
The reason for fewer secondaries, according to VCs, is because no company made it as big as Flipkart.
“Flipkart was in a position to tell its investors that, if you want to put US$100 million, set aside another US$10 million for secondaries. Investors were happy to put in more money,” said a former Flipkart executive.
A secondary can happen only when there is more capital than what a company can utilise. This hasn’t happened in the last two years for startups. All of the late-stage companies in India, from Swiggy to Paytm, have been in very high burn mode. Also, the unicorns have more or less struggled to raise money.