BackStock options back in vogue as funding rounds boost valuations
Stock options back in vogue as funding rounds boost valuations
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Mumbai: InfosysLtd, India’s second largest software exporter, was among the technology companies that rewarded staff with employee stock options, or Esops, which turned some of them into millionaires (although the company’s options programme was short-lived). At the other end of the spectrum, the dotcom era also spawned hundreds of companies that gave away stock options, only to leave employees with penny stocks when they shut down.
For instance, late last month when Mumbai-based listings provider, Just Dial Ltd, raised ₹ 327 crore from venture capital (VC) investors Sequoia Capitaland SAP Ventures, the funding not only left the company flush with cash but also made around 50 of its 6,000 employees very rich.
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E-commerce and mobile technology firms are handing out employee stock options. But does that really mean a new wave of instant millionaires? Mint’s Deepti Chanudhary tells us.
These employees have encashed their stock options through secondaries, or selling shares to another investor, in various funding rounds. Founded in 1996, the unlisted Just Dial has had five fund-raising rounds, with its valuation going up each time.
“We have over 40 crorepatis and nearly 10 dollar millionaires in our company. Investors can buy options from our employees. We don’t have a problem with that," said V.S.S. Mani, Just Dial’s founder and chief executive, adding that the promoters and employees of Just Dial hold a 40% stake in the company.
Mani said stock options are not offered to more than 10% of the employees. Who gets what depends on performance and tenure, with the employee needing to have served at least two years.
Just Dial plans to file a draft red herring prospectus (DRHP) next month with the aim of going public in 2013. “With our IPO (initial public offer) next year, our employees will hit a pot of gold," Mani said.
Similarly, unlisted One97 Communications Ltdhas at least three employees who have reaped substantial rewards through stock options.
Acceptance of Esops will depend on examples where people can see the creation of wealth due to stock options, said Vijay Shekhar Sharma, founder and managing director of One97 Communications, adding that his company’s IPO will create more than 10 crorepatis or people with ₹ 1 crore or more. “In India, Esops are not talked about much," Sharma said.
Stock options represent a deferred compensation plan for companies, so the cash outflow is restricted and takes the form of equity.
For the employee, they are an opportunity to make so-called supernormal earnings by participating in the company’s overall growth rather than just drawing a salary based on the industry’s compensation standards.
Options are offered at a pre-determined price and have vesting schedules. The options vesting and exercise schedule differs from company to company.
Once the stock options are vested and exercised (which can be simultaneous), the employee becomes a shareholder in the company. The price of the option is fixed on the offer date.
Not everyone with stocks options in a highly valued company would have got cash in hand. While companies such as Just Dial, Flipkart, One97 and InMobihave rewarded employees with options, those who haven’t encashed them remain rich on paper.
For instance, Flipkart, which has raised at least four rounds of funding and is India’s largest and best-funded e-commerce company, has at least 50 employees whose stock options have earned them at least ₹ 1 crore if not more. Most of this remains on paper as employees anticipate a further rise in value as the company expands.
“Our employees feel the company is growing and will continue to grow in years to come," said Binny Bansal, chief operating officer and co-founder of Flipkart.
Bangalore-headquartered InMobi, the world’s largest independent mobile ad network, has 25-40 “very wealthy" employees on “paper".
“An IPO or any liquidation event will make these employees very rich. The money is not in hand right now. We have not seen any secondaries happening," said Monisha Tambay, vice-president, global people operations, InMobi.
Staff need to make sure their interests are protected by, for instance, paying close to the fine print on the option.
“Employees need to ensure that the vesting schedule is accelerated, so that they can exercise the options and become shareholders. They need to ensure that their rights are spelled out clearly," said Akil Hirani, managing partner, Majmudar and Partners.
Also, stock options can be a wealth-creation tool only if the company is attractive to investors. Without investor interest, the company won’t be able to go public or get strategic partners, rendering options worthless.
“If a company fails to have an IPO or M&A (mergers and acquisitions) event, the stock options may not yield much value," said Hirani. “There could be options like buying back of stock options, but they can be bought only if they are vested."
Given the uncertainty over how a company could fare over several years, employees are more comfortable with the cash component of salary being increased since stock prices can fluctuate.
At one company that went public a few years ago, the stock is trading at nearly half the price at which options were initially offered to an employee.
“I have refused to buy the last 25% tranche that I was supposed to get now," said the employee on condition of anonymity.
deepti.c@livemint.com
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