At first, the Flipkart-Walmart deal seemed like a much-awaited harbinger of success for the country’s startup scene, but recent developments have raised some alarming questions that remain unanswered.
At 12.38 pm on Sunday afternoon, close to 300 former employees of Flipkart, who held fully vested ESOPs, received an email that confirmed their worst fears.
There had been rumours, but the email with the subject line: "Liquidity opportunity of vested stock options for ex Flipkart employees" told them this was a done deal. The email stated that only 30 percent of their stock options would vest with the company’s 77 percent stake sale to Walmart. There was no reference to the fate of the remaining 70 percent ESOPs.
Speculation has it is that the remaining can be liquidated only at the time of a future liquidity event like an IPO, but that is hardly a palatable solution. Ex-employees are stumped at this turn of events and are asking, "How is this fair? Why are we being treated differently?”
According to sources, current employees of Flipkart will be able to vest up to 50 percent of their stock options now, 25 percent next year, and the remainder the year after. The question now is, why not a similar path for ex-employees whose shares have been vested.
We have sent an email to Flipkart asking for their view, but there has been no response so far.
These are employees who served Flipkart well; they would not have received ESOPs otherwise. The stock options are an acknowledgement of their service and the value they brought to the company. Yes, they have moved on, but changing jobs does not take away their rights to liquidate stock options that have completed the vesting period.
It is true that most companies prefer that employees liquidate their stock options when they leave; it is also true that companies that cannot liquidate shares at the time of an employee's departure often allow them to continue holding their shares. When Flipkart completed a buyback last October, ex-employees could liquidate only 10 percent of their holdings; current employees could liquidate up to 25 percent. The net worth of the shares of ex-employees is currently estimated at $300 million.
The sale of Flipkart, in the world's biggest e-commerce acquisition, is a reason to celebrate, a reason to be optimistic about the future of Indian startups. I truly believe that, and wrote about it as well. But when I heard this news, many questions came to mind: Did the incumbent teams stand up for their former team-mates? Did the Board take a long-term view? Did anyone fight for a better deal for the people who helped make the company what it is today?
Soon, there will be a new Board of Directors brought in by Walmart. Is this the culture they will propagate? Amid rumours that the company might buy up to 85 percent stake within the year, current and potential employees will closely observe Walmart’s approach to ESOPs.
In other startup crucibles around the world, ESOPs have real value; they have created real dollar-millionaires. So why is it that in India, startup ESOPs often don't turn out to be the reward they are made out to be? Is this the wake-up call for Indians to smell the fine print and realise that ESOPs are actually high-risk instruments? If so, how will the Indian startup ecosystem attract the talent that it needs to grow and succeed?