Stock Options Rain Among Startups Looking to Go Public

A large proportion of Indian companies gave their key executives stock options in the years leading up to their listing to keep them engaged and motivated, according to a Deloitte study.

Of the companies that went public in the last three financial years, 54% had introduced long-term incentives (LTI) four years prior to their initial public offering (IPO), according to a study titled ‘Unveiling trends in long-term incentives (LTI) in India pre-IPO’.

“In the case of early-stage companies as well as PE-backed companies, it is both about wealth creation and pure retention for both employees and shareholders. Also, in all three cases, liquidity invariably comes only when there is some form of cash inflow to shareholders; so there is a strong performance element driven by these plans,” said Dinkar Pawan, a director at Deloitte who focuses on executive performance and rewards.

The study covers 60 IPOs, including the 20 largest IPOs by issue size in fiscal years 2022, 2023 and 2024.

Deloitte noted that there are three types of pre-IPO LTI practices: First, new technology companies or fast-growing startups that grant shares to their employees well before they list (in most cases, from the beginning). Second, private equity-backed companies that grant shares to their employees to incentivize them to successfully list. Third, promoter-backed companies that grant shares only when they are close to filing IPO documents.

Down the hierarchy

Equity awards are now moving down the hierarchy. “Modern technology companies are starting to reconsider their equity awards strategy at the junior management level. There are signs that even promoter-led companies are opening up to the idea of ​​early equity awards with restricted eligibility,” says Pawan. The study found that founder-CEOs of technology/e-commerce companies received equity funding worth 150 times more than what other CEOs received.

The Indian market has been on a secular uptrend, prompting many startups to strengthen their listing plans. The deepening of the domestic institutional investor base has led to the Nifty 50 rising 15% year-to-date, closing at 24,717.70 on Friday.

Some of the prominent companies that have gone 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, while others like Ola Electric, FirstCry and Unicommerce are in the queue.

“We have seen in the listings of tech startups like Zomato, Nykaa, Policybazaar, Ola and FirstCry that real value has been created for all stakeholders. The sheer depth of the ESOP pool and the number of employees who are now able to redeem their stakes is significant. These success stories and people making money are likely to attract more founders and employees to the startup ecosystem,” said V. Jayasankar, Managing Director and Head of Equity Capital Markets at Kotak Mahindra Capital Co.

Will this trend continue?

While in promoter-led companies like Mankind Pharma and Unicommerce, the Esop pool was concentrated among top CEOs, in some companies like Swiggy and Zomato, it was more widely spread and included middle management as well.

Dilution rates, employee eligibility and coverage, quantum and stock-based compensation costs (% of employee cost) are significantly higher in technology companies compared to non-tech companies. The continuation of these practices will be a function of liquidity and funding availability, noted Deloitte’s Pawan.

Mankind Pharma’s offer documents show that it has allotted 46,698 equity shares under Esop to 10 key executives. At Unicommerce, the Esop pool is 10% and is concentrated among the top 30 employees of the company, said CEO Kapil Makhija. “We have a large Esop pool of around 10% of equity and it is spread across 30 employees. We are happy that the IPO will help these employees get closer to realising their Esops,” he said. The Unicommerce IPO will launch on August 6.

Esop Pools

The study also shows that the median LTI pool approved by shareholders is 3% of the share capital, which translates into ₹237 crore at issue price. E-commerce/tech products tend to have larger ESOP pool (7.5%). One-fourth of pre-IPO grants were made to CEOs.

Founder CEOs of tech/e-commerce companies received an equity grant that was worth 150 times more than the grant given to other CEOs. Deepinder Goyal, Founder and CEO of Zomato, became richer thanks to ₹143 crore in Esops awarded to him.

Zomato rival Swiggy has also filed IPO documents with the securities regulator. The company is offering Esops but said it was inaccurate to say that employees stay solely because of Esops.

“The fact that Swiggy’s management turnover is among the lowest in the industry is a testament to our commitment to putting employees first and creating an environment conducive to career growth,” Girish Menon, Chief Human Resources Officer at Swiggy, told Mint in response to queries.

According to Swiggy, Esops in themselves are not a retention tool but a value alignment tool, what really matters is whether employees perceive them as true value creation tools. “This perception largely depends on the company ethos, performance and employee orientation. In the last 10 years, Swiggy has delivered over ₹1,000 crore of Esops liquidity across five events. This has benefited over 3,200 employees, which demonstrates our commitment to not only offering Esops but also ensuring that they translate into real value for our team.”