ESOPs in Indian startups - Not Appreciated or Not Understood?

2:14 AM Suvir Sujan 6 Comments

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.

6 comments:

Well Suvir, That being said one should be careful of creating a options driven culture where people are more mercenaries dividing up their stock options from various startups after the cliff perido and thus diversifying their " ESOP portfolio" . Isnt it better to employ people who like the culture than the ESOP or the pay package?

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