Post lower valuation at fund raise, Flipkart gives ESOPs at lower rates to employees

After raising $1.4 billion investment from Tencent, eBay, and Microsoft at a valuation of $11.6 billion earlier this week, online marketplace Flipkart has announced it would issue “differential stock options to all eligible employees.” A statement from the company says that the move is aimed to protect employees from a drop in the share price – a benefit typically enjoyed by investors. Flipkart has not revealed the structure of allocation that is internally decided.

Flipkart was valued at $15.2 billion in July 2015. The current drop in valuation translates to a lower stock price, which would mean a loss for employees who were allotted employee stock option plan (ESOPs) at higher prices. They will be given stock options at the current valuation – at lower prices to compensate for that.

In an email to employees who are part of ESOP programmes across Flipkart, Myntra, and PhonePe, Flipkart Group CEO Binny Bansal said that the differential grant was being made so that the total dollar value of options allotted to an employee remain unchanged.

“As an organisation, Flipkart takes immense pride in being the employer of choice for thousands of professionals – a vaulted status that only comes with a deep, company-wide sense of transparency and fairness. If Flipkart does well, so should you,” Binny’s email has said.

An email to media from the company has stated that it is not common practice to shield employees from a funding round that values a company lower than it was valued at earlier. It adds that the privilege is usually reserved for investors whose holdings are ratcheted up in case of a drop in the stock’s price, so that their equity stake in the company stays at a steady level.

"Of the few startups that have offered such grants, the norm has been to limit it to topmost employees. In Flipkart’s case, however, the grant would be offered to all employees who were allotted stock options at higher than the price established in the latest funding round,” the email said.

Valuation game

Usually, the company’s valuation is translated into its stock price. For instance, if a Flipkart employee gets 100 stocks at $100 each, she has $10,000 worth of stock options. If in four years, Flipkart’s valuation increases to $20 billion from $11.6 billion, then employees’ stock options will double too – instead of $10,000, she will get around $20,000.

To ensure stickiness, stocks are given/sold to employees at a lower valuation so that if the company grows they will benefit. To compensate for the earlier stock holders at $15 billion valuation, they will be given more shares at a lower valuation.

Earlier, Flipkart had offered an option to sell the stocks to the investor; buy part of the stock options from the employees if they want to sell it off. A lot of people used that option.

Strategy for employee retention

Globally, offering ESOPs is a strategy for employee retention. In India, stock option for employees was pioneered by tech companies such as Infosys in the ‘90s. In recent years, Indian startups have increasingly offered ESOPs as a way to curb attrition and help employees build long-term wealth. The eventual windfall, however, hinges on whether the company is able to list publically, or if it buys back the shares.

At Amazon, five percent of stock options will be vested in year 1, 15 percent in year 2, and 40 percent each in year 3 and 4. The company ensures that you are there for years to get the real benefits. In short, as long as you are part of the growth journey, your value of stock options also continues to grow. If the valuation falls, you lose money.

Anuj Roy, Senior Partner at Transearch Consultants, explains: “Many people leave the company because when the valuation falls they might feel that there is nothing left for them there. Giving stock options shows that the valuation won’t fall and that they will grow from where they are now.”

There is no lock-in for ESOPs. Employees are free to leave as they like. But as the stock options go up, you will be incentivised to stay in the company. Generally, ESOPs have expiry date – even if they leave, it won’t expire for 20 or 30 years. People who have already left can sell their stock options when the company goes IPO, and make a lot of money then.