Showered with stock options? Your startup may be headed for an IPO

A big chunk of Indian companies showered stock options on their key executives in the years before public listing to keep them engaged and motivated, a Deloitte study found.

Of the companies that went public in the last three fiscal years, 54% introduced long-term incentives (LTIs) four years before an initial public offering (IPO), said the study, titled Unveiling India’s Pre-IPO Long-Term Incentives (LTI) Trends.

"For early-stage companies, as well as PE-backed companies, it is as much about wealth creation as it is about purely retention for both employees and shareholders," said Dinkar Pawan, director at Deloitte, who focuses on executive performance and rewards.

“Also, in all three cases, liquidity invariably comes through only when there is some form of cash inflow for the shareholders; so, there is a strong element of performance being driven through these plans."

The Deloitte study, which considered 60 IPOs, including the top 20 by issue size in FY22, FY23 and FY24, noted that there were three types of pre-IPO LTI practices. 

First, new age tech-companies or high growth start-ups that grant stock to their employees much prior to listing (in most cases, since inception). 

Second, private equity-backed companies that grant stock to their employees to motivate them to drive a successful listing. 

Third, promoter-backed companies that make stock grants only when they are in close range of filing their IPO documents.

Also read | Swiggy launches $65 million Esops liquidity programme ahead of IPO

Down the hierarchy

Stock grants are now percolating down the hierarchy. 

"New-age tech companies are beginning to reconsider their stock grant strategy at a junior management level. There are signs that even promoter group led companies are opening to the idea of early stock grants with curtailed eligibility," Pawan said. 

The study found out that founder CEOs in tech-product/e-commerce companies received an equity grant that was worth 150x of that made to other CEOs.

The Indian market has been showing a secular upward trend, prompting many startups to firm up their listing plans. The deepening of the domestic institutional investors' base has led to Nifty 50 gaining 15% year to date to close at 24,717.70 on Friday.

Some of the top companies that went public in the last 12-18 months include Mankind Pharma, Mamaearth, DOMS Industries and Tata Technologies. Ixigo, Emcure Pharma, Go Digit, Aadhar Housing Finance, Indegene have gone public this year, and others such as Ola Electric, FirstCry and Unicommerce are in queue.

Also read | Meesho announces its largest Esop buyback, worth $25 million

"We have seen through the listings of tech startups such as Zomato, Nykaa, Policybazaar, Ola and FirstCry, that true value has been created for all stakeholders. The sheer depth of the Esop pool and the number of employees that are now able to realize their holdings are significant," said V. Jayasankar, managing director and head of equity capital markets for Kotak Mahindra Capital Co.

"These stories of success and people making money are likely to attract more founders and employees to the startup ecosystem."

Will the trend sustain?

While the Esop pool in promoter-led companies such as Mankind Pharma and Unicommerce was concentrated among the top CXOs, in some companies such as Swiggy and Zomato, it was more widely spread to include the mid-management too.

Dilution rates, employee eligibility and coverage, quantum and stock-comp cost (% of employee cost) are all significantly higher in tech companies compared to non-tech firms. The continuation of these practices will be a function of availability of liquidity and funding, Pawan of Deloitte observed.

Also read | Mint Explainer: The budget, buybacks, and Esop taxation

Mankind Pharma's offer documents show it had allotted 46,698 equity shares under Esop to 10 of its key CXOs. In Unicommerce, the Esop pool is of 10% which is concentrated between the top 30 employees of the company, CEO Kapil Makhija said. 

“We have a large Esop pool of around 10% of the equity and it is spread across 30 employees. We are glad that the IPO will help these employees come closer to realizing their Esops," he said. 

Unicommerce's IPO will open on 6 August.

Esop pools

The research also shows the median LTI pool approved by shareholders is 3% of share capital, with translates to ₹237 crore at issue price. E-commerce/tech products tend to have a bigger Esop pool (7.5%). A quarter of the pre-IPO grants were made in favour of CEOs.

Founder CEOs in tech-product/e-commerce companies received an equity grant that was worth 150x that of the grant made to other CEOs. Deepinder Goyal, the founder and CEO of Zomato turned richer by ₹143 crore thanks to the Esops granted to him.

Zomato’s rival Swiggy too has filed IPO documents with the securities markets regulator. The company offers Esop, but said it is inaccurate to say that employees stay solely because of Esops.

“The fact that Swiggy's senior-level turnover is one of the lowest in the industry testifies to our commitment to prioritizing our employees' interests and fostering a supportive environment for career growth," said Girish Menon, CHRO, Swiggy in response to queries from Mint.

According to Swiggy, Esops alone are not a retention tool but a value alignment tool, what truly matters is whether employees perceive them as genuine value-creating vehicles. 

“This perception largely depends on the company's ethos, performance and employee-first mindset. In the last 10 years, Swiggy has providedover ₹1,000 crore of Esops liquidity over the five events," Menon said. "This has benefited over 3,200 employees, demonstrating our commitment to not just offering Esops, but ensuring they translate into real value for our team."