Recently one of our portfolio companies was hiring a CXO, and there was a discussion around compensation.  The CXO was offering a healthy ESOP package + 80% of the base salary he was currently making.  In turn, he was negotiating for a 110% of the base salary he was currently making and was willing to take 50% of the ESOPs offered in return. 

Given that this person was coming in at a senior level, it was clear the compensation being offered was healthy enough and that the negotiation from 80% to 110% of base was not to "meet" his living expenses, but more of a belief that the 30% increase in monthly cash flow is worth a lot more than a % of the company.

It is surprising that this trend is very common across the startup world in India today when there have been real examples of wealth creation across the country with employee stock options.  Indian employees in our own portfolio hvae seen stock option gains on the exits of Dimdim, Netmagic, OLX, Gluster, etc. let alone the examples of Naukri, Makemytrip, Baazee, Infosys, Cognizant, WNS, SKS, etc. I believe part of the problem lies in the value of ESOPs not being understood.

The onus lies on the entrepreneurs to spend more time educating their employees on what stock options mean, what they believe could be the various exit opportunities and various values at exit with probabilities attached to those outcome along with the risks. While there is no gaurantee at the end, it is helpful for the employees to really understand how the entrepreneur is thinking and what the entreprenuer believes are the probabilities and risks attached.

The entrepreneur also needs to work on building excitement and trust with potential employees pre-hiring where the employee believes in the company's vision and dream and is viewing the company as an owner and not just an employee where he or she is contributing to the wealth creation of company and self.  This is especially critical at the senior levels.

There has been a fair bit of early stage investing in the Indian internet sector over the last 6-7 years across sectors. Many of these companies have scaled, achieved market dominance, but are still burning cash and are looking for $25-50m in capital that will take them to profitability and/or a public listing.

If these companies were in the US, many would have raised a growth financing round relatively effortlessly - market leaders in their space in open ended spaces with potential supernormal return opportunities.  The investors understand the risk associated with the investment and fully understand that this is a higher risk higher return opportunity and they have a portfolio strategy that take this into account.

However raising capital for many of these unprofitable internet ventures has not been easy for a variety of reasons, one of them being the legacy of investing in India at the growth/later stage that have been profits/cash flow based with structures that protect downside and limit upside. Certainty of return is more important than magnitude of return.  As one of the growth investors put it succintly, "I cannot afford an investment to be worth nothing. We don't take a high risk high reward portfolio approach. I don't care how big this upside can be". Most of these investors don't have a portfolio strategy that allows for an investment to fail and are looking for safe returns on most of thier investments.

So many of the Indian internet ventures have unfortunately have had to turn to growth capital from financial or strategic investors outside India who have an interest in investing in India. But because many of them are not based in India, they are concerns on trying to manage an investment remotely without being close to the market. So it has not been easy to raise this capital.

For Innovation to thrive in India in the Technology and Internet space,  India will not only need more risk capital at the early stage but also more risk capital at the growth and later stage.  Hopefully, either some of the global investors in this space will decide to focus on India and set up teams or the Indian PE players will start to change their strategy and approach and start investing in these sectors. Till that happens, the Indian Innovator will have to continue to look overseas for growth capital.