Founders are being incentivized with large amounts of stock options, encashment of part of their holdings in secondary share sales and, in some cases, even direct equity rewards
Bengaluru/New Delhi: Investors at India’s top online start-ups, e-commerce marketplaces Flipkart and Snapdeal and taxi aggregator Ola, are incentivizing the founders of these companies with large amounts of stock options, encashment of part of their holdings in secondary share sales and, in some cases, even direct equity rewards.
Flipkart, Snapdeal and Ola have together raised more than $4.5 billion so far, resulting in a significant reduction in the ownership stakes of their founders, all of whom continue to run the companies.
Kunal Bahl and Rohit Bansal, co-founders of Snapdeal, together own roughly 9% of Snapdeal’s parent company, Jasper Infotech Pvt. Ltd, documents show. While Ola promoters Bhavish Aggarwal and Ankit Bhati together own about 12-14% of the holding company, ANI Technologies Pvt. Ltd, Sachin Bansal and Binny Bansal own roughly 8-9% each of Flipkart Ltd, according to official documents.
Fearful of a scenario in which these young entrepreneurs may become disillusioned at losing so much of the companies they’ve built, investors are designing a combination of compensation tools to reward them handsomely and avoid distractions, according to shareholders in these start-ups. They spoke on condition of anonymity as they aren’t allowed to speak with reporters.
Even at a few other large start-ups such as online marketplace Paytm, investors are encouraging founders to cash in some of their gains and imposing a minimum amount that a founder must own, the people cited above said. “The stakes are too high now. We can’t afford a situation where founders are focused on anything but the business. Simply put, founders need to have enough skin in the game. They also should not be worried about their dilution when they’re raising more capital. So this (securing ownership stakes of founders) is in everyone’s interest," one Snapdeal investor said.
Flipkart and Ola did not respond to emails sent on Monday. Snapdeal declined to comment.
Indian law prohibits companies from issuing stock options to promoters. To get around this, companies are creating trusts that are in turn controlled by start-up founders, according to the people cited above.
The investors are creating a management stock option pool which get converted into equity over a mutually agreed period. These, in some cases, are linked to business metrics such as company goals and the founder’s performance.
Japan’s SoftBank Corp. pledged to return equity of 0.5% each to Bahl and Bansal when it invested $627 million in Snapdeal last October, according to official documents with the registrar of companies (RoC).
Additionally, a separate stock option pool comprising 0.82% of the company’s capital was created for the company’s promoters, the documents show. Bahl and Bansal also cashed in a part of their holdings through secondary share sales last year, the people cited above said. Snapdeal was valued at roughly $2 billion when it raised money from SoftBank in October.
At Ola, Aggarwal and Bhati were rewarded with new equity shares on two occasions over the past year, documents with the RoC show. Aggarwal received a total of 1,929 equity shares while Bhati received 887 shares. Given Ola’s estimated valuation of $2.5 billion, these shares are potentially worth tens of millions of dollars.
Flipkart founders Sachin Bansal and Binny Bansal have encashed part of their stakes in secondary share sales and are now investing in start-ups from their bounty, the people cited above said. The Bansals’ personal worth amounts to roughly a $1 billion each, given Flipkart’s estimated valuation of $15 billion.
Mint couldn’t get details of the secondary share sales in Snapdeal and Flipkart.
“Initially there used to be no science behind dilution and hence founders in start-ups were reduced to low equity stakes," said Prateek Srivastava, chief executive officer at Basil Advisors, a talent advisory firm. “As investors are slowly realizing the need for founders to have a sizeable stake to stay motivated, they are coming up with various ways to reward the founders."
When start-ups raise large amounts of capital over multiple rounds, the ownership of founders can fall dramatically, which can potentially become a disincentive for them, said Srinivas Katta, partner at legal firm IndusLaw, which works with start-ups.
“From being a founder or an owner, a founder can start thinking that he is working for investors. Investors recognize and respect this and are usually ready to offer ESOPs (employee stock option plans) and other equity-linked compensation to founders. ESOP laws, however, prohibit grant of options to founders. There are workarounds available, but they are complex and time-consuming. The law needs to be amended to permit grant of ESOPs to founders in these situations," Katta said.
At the same time, ESOPs need not be offered to founders who control a majority of the company’s capital, he said.
“ESOP laws need to find the balance between protecting the shareholders and encouraging the founders. After all it is in the shareholders’ interest to appropriately incentivize founders," Katta said.
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