While the rekindled fire for ESOPs isn’t warming up employees, companies and investors see it differently. “Companies are cash-strapped and ESOPs are a non-cash expense,” said an investor who didn’t wish to be identified. “We are replacing the salary with a higher value of equity. If the valuation is currently lower, employees get more shares. So the upside is higher if tides turn. Then, it’s a win-win.”
That upside, though, is a big if. Few companies will cross the Covid chasm, let alone return to earlier valuations. To further accelerate ESOPs’ decline, companies are playing fast and loose with their policies in these pandemic times.
It’s a house of horrors, said Ritesh Banglani, partner at Stellaris Venture Partners. “In several companies, the board can decide whether or not the employee can exercise their vested options. These are options the employee has already earned. They reasonably expect to be able to exercise them freely, especially when they decide to leave the company.”
The wild, wild ESOP vest
In the case of ride-hailing company TaxiForSure*, everyone who had ESOPs, even month-old employees, were allowed to vest their shares and became millionaires when Ola Cabs acquired it in 2015, according to VCs we spoke to.
Then, there is intercity bus aggregator redBus. When it was sold to travel aggregator Ibibo in 2013, only redBus’ three founders walked away with their millions. None of the other 22 employees who had ESOPs were allowed to vest their shares on an accelerated basis. This is usually the expectation when companies head for an IPO or acquisition. Though the clause for accelerated vesting existed in ESOP agreements, it was left to the company’s interpretation.
RedBus is hardly alone
“I have seen founders unilaterally cancel an employee’s vested options,” said Stellaris’ Banglani, who is putting together a model ESOP policy for his portfolio companies to use. “That is no different from refusing to pay an employee’s promised salary after they have already put in the work.” Banglani did not disclose names but indicated that these include companies that have raised late-stage capital from top VCs.
Companies also have troublesome clauses mandating vested stocks to be exercised in as few as 30 days. For instance, Paytm* has an exercise period of just 30 days. (On an average, the exercise period spans about two years.) That means employees need to pay both the strike price and the tax to get their shares transferred to their Demat account as soon as they resign. After 30 days, their vested options would go back to the company.
“Because of this clause, I’ve had to exercise my shares, and I’m desperately looking for buyers,” said a former Paytm employee who quit in late 2019. “At least I have to recover the tax I paid on this. Paytm shares were being lapped up at Rs 18,000 (US$238) in 2019. Now, I’m not finding buyers even for Rs 8,000 (US$106).” This person paid a tax of Rs 2,600 (US$34.4) per share and wants to hold out till the price recovers.