Feb 2022: Employees richer by $40m, Udaan avoids the Cliff & Bad Leaver ESOP learnings from BharatPe Saga

In the world of ESOPs, February was like that action packed 20–20 match. Despite being a shorter month, we witnessed a lot of activity and some drama too. February saw 7 companies announce liquidity programs to the tune of $40 million. Looks like we are sustaining the ESOP liquidity volumes we ended last year with. That means we are poised for yet another year of record ESOP buybacks.

Before we get to the buyback roundup, let’s explore a couple of key happenings of the month.

Udaan removes 1-year ESOP cliff

In line with their philosophy of ‘deep employee trust’ and ‘shared entrepreneurship’, Udaan in a first-of-its-kind move has removed the 12 month cliff clause from their ESOP program. In addition to this, they will also make the their vesting schedule on a quarterly basis (presume earlier it was annual).

This means Udaan employees who receive ESOP grants will start vesting their options immediately on a quarterly basis, without having to wait for 1 full year to vest their first tranche of ESOPs.

But hold on, like many founders asked me, how did they avoid the ‘mandatory’ 12 month cliff?

Well our educated guess here is that the ESOPs are structured within Udaan’s parent company incorporated in Singapore and hence the 12 month mandatory cliff rule doesn’t apply. It only applies to schemes that are managed at an India incorporated entity level as per Companies Act, Share Capital and Debenture Rules 2014.

Learnings from BharatPe Saga: Beware of the ‘Bad Leaver’ or ‘Clawback’ clause in your ESOP policy

While the twitterati is busy forming opinions on the BharatPe saga, let’s attempt to analyse some facts and learn a few things.

Recently, there was a media article that a key executive, who used to head controls function at BharatPe, was supposedly ‘terminated with cause’ and had to also forfeit her equity as the ‘clawback’ clause was applied as per the employee agreement. While it was not super clear whether it was her ESOPs or shares (which might have been exercised).

However the point to note is that — the clawback clause could apply to any employee with ESOPs.

If you read the fineprint of your ESOP Policy, there would be something called a ‘Separation Clause’ which basically determines how should the ESOPs be treated in the event of an employee leaving the company.

Under this clause, look for ‘Termination with Cause’. As the new article reports, this employee was terminated by the board with ‘cause’, which meant the clawback or bad leaver clause got triggered.

Once the clawback or bad-leaver clause gets triggered, the employee would lose out both vested and unvested options.

This is of-course harsh for the employee, but then again, it is invoked only under certain special circumstances based on certain misconduct etc.

That said, there have been cases, where employees have reported that normal resignations (Voluntary Termination) or company wide layoffs (Involuntary Termination) have also been tagged as a ‘bad leaver’ exit event and employees were snatched off their vested ESOPs which was rightfully theirs.

Read this example:

Bottomline: Notwithstanding the fact that ESOPs are finally becoming increasingly friendly to employees, the board of the company does act as a third-umpire on certain matters and does exercise an element of discretion.

So do keep an eye on this.

Perhaps speaking with employees who have quit the organisation in the past, that you are now joining might help you to get an idea on this. So please do your Due-Diligence :)

Apart from the bad-leaver case, the Separation clause in the ESOP policy is also extremely important to understand the treatment of ‘vested options’ post separation, i.e. how much time do the employees have to exercise their vested options post leaving the company.

From an employee perspective, the longer the exercise period post resigning, the better it is for them. This ensures, they do not need to shell out any income tax on the unrealized value of the exercised options.

Ok with that, let’s get back to our monthly round-up ritual.

Feb ESOP Buyback Roundup: $40 million worth ESOP Liquidation

Slice, Cars24, Gramophone, Bizongo, LEAD, FarEye, The MathCompany have announced their ESOP buyback plans worth over 300 crores in total. This infographic from Entrackr summarises the roundup quite well. Let’s dive into the details now.

Slice announces maiden ESOP Buyback worth $8.7 million

Bengaluru based fintech start-up Slice announced the completion of their first ESOP buyback worth INR 65 crores. Around 60 former and existing employees holding vested stocks in the company were eligible for the buyback and about 54 of them participated in the buyback.

Slice, in November 2021, had raised around $220 million as part of its Series B fundraise, marking its entry into the unicorn startups club.

Cars24 announce fourth ESOP buyback worth $10 million

Used cars ecommerce platform Cars24 has announced their fourth ESOP buyback program worth INR 75 crores. With this, the value of total ESOP buybacks by Cars24 stands at INR 113 crores. The company raised $400 million in Series G funding at a valuation of $3.3 billion in December 2021

Gramophone announces ESOP Buyback program worth $2 million

Indore based Agritech startup Gramophone provides liquidity to key team members and angel investors through ESOP buyback worth $2 million (around Rs. 15 crores). Gramophone has ESOPs planned for every level of employees, from on-ground farmer relationship team to senior management. The platform claims to have witnessed a 10 fold growth in its revenue over last year.

TheMathCompany rolls out ESOP buyback program worth $12.3 million

Data analytics and data engineering company, TheMathCompany rolled out ESOP buyback program worth INR 93.2 crores to reward its employees. Over 20% of the company’s existing workforce hold ESOPs.

One of the key highlights of this program was that employees are allowed to offer 100% of their vested options through this program. So basically employees can cashout fully if they choose to.

This is on back of the company securing $50 million funding from Brighton Park Capital early this year. Again, that’s a healthy 25% of the overall investment pool which is much higher than average.

Bizongo announces its first ESOP buyback worth $3.7 million

E-commerce focused packaging company Bizongo has executed its first ESOP buyback worth INR 28 crores. 102 former and existing employees were eligible to offer their vested options and over 70 of them participated in the buyback. In December of 2021, Bizongo raised $110 million in a Series-D round led by New-York based Tiger Global Management at a valuation of $600 million

LEAD Schools announces ESOP buyback scheme worth $3 million

EdTech unicorn LEAD has announced an ESOP monetisation scheme worth $3 million (around INR 22.5 crores) for its employees. This comes on the back of a recent series E round where the company raised $100 million led by Westbridge Capital and GSV Ventures at valuation of $1.1 billion to become first Indian Edtech unicorn of 2022.

FarEye announces second ESOP buyback plan worth $1.2 million

SaaS start-up FarEye has announced their second liquidation program for ESOP holders worth $1.22 million (around 10 crores). Under the liquidation, eligible employees are allowed to liquidate a fixed proportion of their vested options. Previously FarEye had concluded ESOP buyback worth $739K (around INR 5.6 crores) in January 2021

FarEye had raised $100 million in its series E round led by TCV and Dragoneer Investment Group, last year.

So with January closing at $30 million and February at $40 million, employees have already unlocked $70 million worth wealth in 2022 signalling a very healthy and prosperous year for the operators of startup ecosystem as we look to catapult a larger number of unicorns in 2022. We’ll of course keep you posted on the developments.

Stay tuned to Fables Of ESOP 🙂

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