Hissa launches $35M fund to unlock liquidity in ESOP market

Equity management platform Hissa has launched Hissa Fund I with a corpus amount of $35 million to provide liquidity to the Indian employment stock option plan (ESOP) market.

Designed as a SEBI-registered Category II Alternative Investment Fund, the firm will look to invest in about 15-20 growth stage startups and work closely with the founders to provide liquidity to help retain talent and align with their business growth strategies.

The fund is aiming for a ticket size between Rs 8 crore to Rs 10 crore per company.

ESOPs are a program under which employees of the company earn a stake in the company through ownership of shares. However, these options can only be exercised after an IPO or an acquisition.

According to Satish Mugulavalli, Partner at Hissa Fund, as more and more capital gets infused into the private markets, companies are taking a longer time to need public funding. This has resulted in employees holding illiquid shares of the company for a prolonged period of time. The new fund will aim to address this gap.

“We felt it was a little unfair that the people helping build these companies are not able to realise the value that's created because there's no liquidity. That prompted us to insert a liquidity product where you are able to provide some sort of periodic liquidity without waiting for an exit. While the big liquidity will happen at the end (through an IPO or an acquisition), you are seeing some sort of liquidity happening in the middle,” Mugulavalli told YourStory.

The fund’s limited partners (LPs) primarily include founders, high net worth individuals (HNIs) and family offices who have already invested in startups. However Mugulavalli said it was too early to disclose the names of these LPs.

Hissa will also have a stock picking criteria, similar to any other VC fund. It is actively looking for Series B companies and have valuation criteria that would need to be met. The offer made to the startup will anchored on the latest valuation of the company, however, like every financial asset, depending on the company, the asset might run at a discount or a premium valuation.

“If you're a real hot company, it may go at a premium But that's a decision that's made at that point in time. But you will anchor into the last large financing round that took place in the company,” Mugulavalli said.

The fund hopes to disperse the entire amount completely by the end of this financial year or first quarter of FY26.

Exit strategy

Since ESOPs can only be exercised if the company files to go public or during an acquisition, the fund has a number of options to exit a startup.

The fund can hold the shares until the company IPOs or gets acquired or it can exit whenever a large fund invests in the company, since it does not hold a significant portion of the company.

“So depending on how we look at the asset, what the IPO prospects are we will make a decision on do we hold till IPO or do we exit at a slightly earlier stage. Again the key concept here is at no point in time we end up holding more than 1.5-2% of the company. Because we are a small shareholder, the data suggests that it will be possible for us to exit out early if we choose to,” Mugulavalli notes.