Dilute more shareholding and ask for ESOPs: SoftBank's Rajeev Misra tells startup founders

Rajeev Misra, CEO, SoftBank Investment Advisers

Startup founders should not hesitate to dilute more of their stakes to raise funding amid a valuation regime that is sliding lower by the day, and ask investors to give them employee stock options (ESOPs) as compensation, according to SoftBank Investment Advisers chief Rajeev Misra.

“(They should) Build the right foundation and grow gradually. Don’t overvalue a company. You don't have to go from a $1 billion to a $3 billion valuation. Dilute more and ask for ESOPs,” Misra said in an interview with Moneycontrol.

This remark came when he was asked whether founders were being given the wrong incentive of growing too fast, and hence ended up playing fast and loose with corporate governance.

“Depends on the founder. If they have a short-term view, it is an incentive problem. They all have ESOPs. If they take a 10-year view, then you will be fine. It should be long-term,” he added.

Misra also said that corporate governance lapses in Indian startups weren’t too many when seen in context — such issues were much more prevalent in the West and in brick-and-mortar businesses, according to him.

In the past couple of years, as several unicorn startups like Paytm, Zomato, Delhivery and Policybazaar went public while losing hundreds of crores each year, many stakeholders have questioned the practice of allocating large ESOPs to founders.

Incidentally, SoftBank is a shareholder in all of these four companies. Misra defended the practice and said that all of it was disclosed before the firms hit the bourses.

“Incentivising the management is nothing wrong. Don't forget, two years ago, it was difficult to retain staff and keep management also… ESOP vesting is useless unless it is given for free. If it is given at a strike price and the stock drops to half its value, it is worthless anyways,” he argued.

For example, ESOPs given to Zomato co-founder and CEO Deepinder Goyal cost the company Rs 143 crore in the second half of FY23 even as the company is trying to convince public market investors of imminent profitability.

Moneycontrol reported earlier that expenses of listed new-age companies came down significantly in FY23 at a time when the market turned tougher for loss-making tech outfits, according to data filed by the firms on the exchanges.

Zomato's share-based payment expenses declined by the most, at 42 percent. Nykaa brought down such costs by 36 percent, while Delhivery and Policybazaar saw smaller drops of 10 percent and 11 percent, respectively.

Fintech major Paytm was the outlier of the pack as its ESOP expenses rose 80 percent from Rs 809 crore in FY22 to Rs 1,456 crore in FY23. Its net loss amounted to Rs 1,776 crore for the financial year, narrowing from Rs 2,396 crore a year earlier.

Venture capital backers of such new-age companies say that such ESOP grants to founders are required to keep them interested in running the ship, given that their shareholdings are diluted to a large extent due to successive rounds of fundraises.

“If the dilution was a result of competitive raising, there could be a more sympathetic view… Maybe some amount (of ESOPs to founders) is justified, such as 1-3 percent of the company,” Info Edge founder Sanjeev Bikhchandani said last year. Info Edge was one of the first backers of Zomato and Policybazaar and still retains significant holdings in the two companies.