when a company goes public what happens to founders stock
Virtually half-a-dozen startup founders whose companies are debuting on the stock markets in 2021 are being wooed past their company's board with additional stake and other milestone-linked rewards to ensure they retain "peel in the game," people involved in the process told ET. They said the growing trend is aimed at "rewarding" founders at firms where typically, investors own significantly higher stakes than entrepreneurs.
Policybazaar parent Atomic number 82 Fintech, which is listing on bourses on Mon, granted fresh options upwardly to 10,657,500 to founder Yashish Dahiya, while cofounder Alok Bansal received iv,567,500 new options, as per the red herring prospectus. Dahiya and Bansal own four.27% and 1.45%, respectively, in the firm, compared to SoftBank, which owns more than xv%.
ET reported last month that all five founders of PharmEasy were given 9,987 stock options under its employee stock buying program (Esop) before it filed its draft initial public offer (IPO) papers.
The lath of IPO-bound logistics startups Delhivery has canonical grant of new stock options to its founders and senior leadership thrice this year, with the latest existence in September, according to regulatory documents and its typhoon IPO paper. These grants are often performance- and time-based, with unlike vesting schedules, but it boosts their holdings in the company.
"Founders take been given long-term Esops for continuing to lead the company over the side by side half-dozen to seven years. In some cases, founders have too invested their own coin, to show their confidence in the firm at pre-IPO round valuation," said one of the founders going public this twelvemonth, explaining why the board had granted the new stock options and awarded them a bonus for achieving certain milestones.
ET too reported in September that Paytm founder Vijay Shekhar Sharma is getting a meaning amount of new stock options that would increase his belongings by 2-three% in Paytm parent I 97 Communications, which is due to list on the bourses on November 18.
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Similarly, Zomato founder Deepinder Goyal was also allocated near 70% of new stock options as function of its 2021 Esop programme before going public.
"This has emerged as an of import trend in tech startups to instil conviction in the management of a company after the listing," people involved in the approvals told ET.
They said nigh startups with multiple founders cease upwards having low single-digit holdings in their firms by the time of the IPO, in contrast to the situation with US-based startups. Without such options beingness granted, in that location is little incentive for an entrepreneur to continue scaling their ventures when early investors are clocking record gains through the IPO, the sources said.
For founders who can't immediately sell their shares, a lot of their net worth is on paper during the listing process.
Inspiring Confidence
Experts are of the view that this growing trend is a positive one for the startup sector.
Siddarth Pai, founding partner at venture fund 3one4 Majuscule, pointed out that "compared to major US startups, where founders tin can take thirty-40% in their company, (in India), it is in unmarried digits to early teens, depending on whether it'due south a solo founder of multiple cofounders."
"Likewise the new options and bonus being an incentive, it also increases their (founders') stake in the company after the IPO and inspires confidence in management," he said. "Pare in the game and shareholder alignment are crucial for investors. It'south a combination of factors that are at play, as founders at present also take to exist answerable to analysts and public shareholders."
Several industry executives involved in the IPO plans of a company said many of the startups had plans to go public a couple of years ago, only they couldn't, and and then had to dilute their holdings to raise capital to sustain operations. "Now they (founders) have taken the visitor to this phase that anybody can get some exit and clock good returns. I recollect investors are well aligned with these approvals and this is needed," said a venture uppercase investor who has seen at to the lowest degree ii of his portfolio firms issue such options to founders.
In contrast to Nykaa's Falguni Nayar and Paytm'due south Sharma, who is a solo founder, about entrepreneurs together concur x% or so at the time of an IPO. "There is a delivery to brand nigh of the tech companies profitable and create more value. While public shareholder scrutiny will go up on performance every quarter, they (shareholders) must besides admit the founding team's delivery," this person said.
And it's not just an IPO-spring company rewarding its superlative management — Tata-endemic BigBasket founders were given 'MSOPs' later the acquisition, as reported by ET in September.
"They (founders) are typically in low unmarried digits and this (new options) helps in topping it upwardly," said Mohan Kumar, founder and managing partner at Avataar Ventures. "After listing, they have to sustain valuation, get scrutinised quarter-on-quarter and are expected to run the visitor without any glitch in the next iii to four years. That's a fair deal for founders."
Executives ET spoke to said there is no room for error, going frontward, and two to 3 quarters of relatively bad functioning tin trigger rude reactions from investors. "Before, it was merely your board (beingness answerable), but not once you go public. The expectation on execution is of existence flawless after having raised money at college valuation than private markets," some other senior industry executive told ET.
Pai said that having the founding team around mail-IPO is critical, every bit in case a founder leaves soon after listing, the price (of the stock) could crash and have untold repercussions on the visitor. "Founder transitions, especially after listing, place the company on very precarious ground," he added.
Another senior executive at 1 of the major startups doing one of the largest IPOs said the board itself had proposed allocating new stock options to the founder, as he had not taken whatsoever before. "It was unanimously agreed (upon)," he said.
Global Trends
This is also a global tendency, where founders in Silicon Valley and other global markets accept got similar rewards in the run-upwards to going public. In fact, founders in US tech companies oft become a hefty leap in their pay packages for having taken the company to the IPO stage, a recent report by Wall Street Journal said. In Bharat, well-nigh founders of the acme startups earn anywhere between Rs 1-iii crore per annum, including variables.
All said, some of the incentives and changes for founders are as well being done by keeping in heed the possibility that some public investors might not agree to granting such rewards to founders. Shareholder activism in tech companies going public is an inevitability and founders volition exist probed more than deeply on a quarterly ground, according to Pai.
"At those points, performance is the only thing that matters, and whatever further management incentives will be linked to performance and probed securely," he said.
I of the investors mentioned above said it's a matter of time before some shareholders will bring activism to tech companies, like others. "Information technology will happen. The extent to which it plays out is for all of us to run across over the side by side one to two years," he said.
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Source: https://m.economictimes.com/tech/startups/ipo-bound-startup-founders-get-stock-options-bonus-for-life-after-listing/articleshow/87704415.cms
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