ESOP cashout events drop by 62% in 2023 as funding winter bites

After Flipkart, the biggest ESOP cash outs in 2023 were offered by Swiggy ($50 million), Tredence ($30 million), Pefios ($18.5 million) and Porter ($6.25 million)

The number of employee stock option (ESOP) cashout events by startups fell by more than 62 percent to 16 in 2023 from 42 a year back as the funding winter deepened, according to data from equity management platform Qapita. This was a three-year low from 2021, when a pandemic-induced funding boom was at its peak, with 43 such ESOP cashout events in the startup ecosystem.

However, a $700-million cashout offered by Walmart-owned Flipkart to its employees due to a regulatory requirement meant that the total value of ESOP cashouts in the Indian startup ecosystem surged 178 percent year-on-year to $812 million.

Apart from the mega ESOP cashout of Flipkart-PhonePe, the total value of ESOP liquidity events in 2023 was a miniscule $112 million, when compared to $292 million of 2022 and $423 million of 2021.

Flipkart bought back ESOPs worth about $700 million from employees as a part of its move to separate full ownership of payments and financial services unicorn PhonePe, as the e-commerce giant looked to hire and retain talent at a time when most startups in the country have been undertaking layoffs due to the ongoing funding winter.

After Flipkart, the biggest ESOP cashouts in 2023 were offered by Swiggy ($50 million), Tredence ($30 million), Pefios ($18.5 million) and Porter ($6.25 million).

At the time of the startup funding boom of 2021-22, there were stories galore of how employees were negotiating more ESOPs and less cash payments as part of their salary negotiations with tech startups. To be sure, a large part of that enthusiasm to maximise the ESOP component of pay packages has been watered down due to the funding winter, which has put a lid on the rocketing valuations of private tech companies.

However, industry insiders say that as startups cut their cash burn amid the funding winter, the role of ESOPs as a significant attraction of the overall compensation will only increase.

The overall funds coming into Indian startups through the private equity and venture capital routes plummeted to $814 million in 2023, a third of the previous year, even as December showed early signs of recovery with a series of funding announcements during the month.

ESOP cashouts have led to $1.46 billion of wealth in the hands of startup employees since the beginning of 2021, according to data from Qapita, signalling a change from the times when startup employees were not quite sure if the options would turn into a real shareholding and then into money.

Industry insiders say that a string of successful initial public offerings (IPOs) such as Zomato, Paytm, Delhivery and frequent ESOP liquidity events by much smaller startups have helped change the narrative.

“When you join a startup as an employee, you join for a significant multiplier of wealth and that multiplier is the ESOP. The salary is at best on a par with the market, but never really a differentiator. The challenge, of course, is that there is always an element of risk with ESOPs,” says Harshil Mathur, founder and CEO of fintech unicorn Razorpay.

“We have seen people at our company create life-changing wealth through ESOPs. They would have never been able to do that with salary increases even over a decade,” Mathur said.

Razorpay has done four ESOP buybacks in the last 10 years of its existence, with the latest taking place last year, when it bought back $75 million worth of shares from employees.

Mathur says that every time the company raises a new round of funding, it negotiates a secondary share sale by employees with incoming investors.