Online education infrastructure startup Teachmint has launched a program which will let employees sell their shares as soon as they are eligible and give them more financial leeway, a key move to retain people amid a war for talent in the startup space.
This plan is meant to give employees more control over their finances and remove the back-room drama that often follows ESOP share sales in India.
The Continuous Liquidity Plan ensures that as long as employee shares are vested, they can sell them whenever they want, rather than when the company raises money, when investors decide to buy back or when the founders decide- as is generally the norm, Teachmint’s co-founder and CEO Mihir Gupta told Moneycontrol
Employee Stock Option Plans are gaining traction at startups, with IPOs and secondary share sales leading to employees making many times their annual salary from stock sales, ranging from lakhs to hundreds of crores. 16-month-old Teachmint, backed by investors such as Lightspeed India issues ESOPs to each of its 154 employes will continue doing so, underscoring the importance of the tool
“We are doing this so that ESOPs stop being a hypothetical number and create actual meaningful wealth which can make a difference to a team member’s life. This becomes a comparable proposition to a public company which would offer tradeable ESOPs,” Gupta said.
ESOPs have a vesting schedule, where at the end of each month/year, a certain portion of shares ‘vest’- meaning the employee can sell those shares. However even vested shares often take time- if ever to become actual cash, as the company or its investors need to buy back those shares, have money in the bank to do that, and the valuation at which employees can sell shares is sometimes a bone of contention as well. Sometimes companies buy employees shares at a steep discount to the original valuation.
Teachmint is however offering these ESOP buybacks at a valuation of $500 million, the same as its funding round of $78 million recently.
Teachmint’s ESOPs are structured in such a way that after an employee completes one year, he is eligible to sell 25 percent of his shares, a figure that goes to 50, 75 and 100 percent in the following 3 years.
It has a total ESOP pool of $30 million, but since it is a young startup, most employees don’t have vested shares yet, and the new tool is built to give them financial freedom in the future. For instance if a person needs a lumpsum for an emergency, life event or vacation, they can sell their shares, rather than waiting for when the company raises money, as is usually the norm.
Teachmint will ensure that employees can sell shares whenever they want by keeping aside money for share sales each year as part of its annual budget, so that buybacks are not tied to fundraisers or whims of any investor or founder.
Curiously though, the move may incentivise employees to sell shares earlier than they otherwise would, reducing their will to stay longer at Teachmint and maybe leading to higher employee turnover, something most companies don’t want.
Gupta however said that this is unlikely to happen. “People do deliver considerable value in 2-3 years. While someone staying for 4-5 years is ideal, it is becoming rare in the tech industry. You have to account for churn and still reward employees,” he said.
Besides IPOs such as Zomato, Nykaa and Policybazaar, where ESOP holders make handsome returns, other privately held startups have also done ESOP buybacks aggregating to hundreds of million of dollars in the last 18 months. At most growth to late stage companies, an ESOP buyback has become a standard feature alongside a large fundraise. Startups which have done this include CRED, Urban Company, Moglix, Razorpay, Licious, Whatfix and Zerodha.
Similar to Teachmint, food delivery firm Swiggy last month launched a $35-40 million ESOP plan , where employees will be able to tender shares they hold in the company twice over the next two years, in a move to create more visibility and transparency
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