ESOP buybacks among Indian start-ups may resurge as macro headwinds ebb

The one good news that came out of the Indian startup ecosystem in 2023, so far, is the $700 million payout that Flipkart made to its employees. The payout was a result of the separation of Flipkart and Phonepe.

This payout has made close to 20,000 employees at Flipkart and Myntra earn lakhs to crore in payouts.

Employee stock option programmes (ESoPs) or buybacks of shares has been a very common trend in 2020 and 2021, when companies were flushed with funds and used those as a tool to attract and reward good talent.

Earlier this week, Swiggy too announced its second tranche of a planned ESOP liquidity programme worth $50 million. This was the fourth liquidity event from the company since 2018.

But with the funding winter, the issuance of ESoPs has also entered in the slow lane.  

During the first half of 2023, only nine companies announced liquidity programs worth over $40 million. This was a sharp decline from previous years. The year 2021 saw the quantum of ESOP liquidity programs cross the $400 million mark while this figure was over $300 million in 2022, according to data from the equity management platform Qapita.

“While the first half of 2023 has been a difficult year from an ESOP liquidity standpoint, recent announcements from Flipkart and Swiggy definitely have the potential to turn the tide aided by easing of capital flows into the market,” says Ravi Ravulaparthi, co-founder and CEO, Qapita.

This was, in part, due to the so-called funding winter that kicked in during the second half of last year, taking the Indian start-up ecosystem by surprise.

Funding among startups hit new heights in 2021 when investments reached a total of $44.5 billion. Since then, capital has become much harder to come by. Total funding fell to almost half in 2022 at $26.6 billion, while start-ups raised just $5.5 billion in the first half of this calendar year, according to data from Tracxn, a market intelligence platform.

ESOP buybacks, the primary method of liquidation for employee-owned stocks, usually follow the prevailing funding trend.

In 2022 alone, over 40 companies announced ESOP buyback programs. In contrast, only 12 companies have announced programs until July so far, data from Qapita signposts. Furthermore, fewer companies are disclosing the quantum of their liquidity programs while offering ESOP top-ups or accelerated vesting instead of cash increments.

Despite a slowdown in these liquidity programs, recent ESOP buyback announcements by e-commerce major Flipkart and food aggregator platform Swiggy have seemingly rekindled the momentum of such programs.

With these two announcements alone, the total ESOP liquidity quantum in 2023 so far has reached around $790 million, much higher than in previous years.

“We anticipate a potential uptick in ESOP buyback programs among start-ups in the future, as the start-up funding landscape shows signs of recovery and macroeconomic headwinds begin to ease,” says Manish Khanna, co-founder, Unlisted Assets – a technology-driven platform for buying and selling unlisted shares.

“Once the funding winter and valuation figures settle down, start-ups may prioritize rewarding and retaining employees through ESOP buybacks, aligning their interests with company growth,” he adds.

However, the extent of this resurgence may vary depending on individual company policies and financial situations. The decision to implement such programs will be contingent on each company's specific circumstances and financial comfort.

While experts remain optimistic about ESOP liquidity options going forward, exit options for ESOP holders are still hard to come by. In the absence of frequent buyback programs, the options for employees to get liquidity are limited.

Says Ravulaparthi, “Companies are also exploring alternative mechanisms such as third-party sale programs by finding investors willing to do a secondary purchase of shares, thus offering liquidity to ESOP holders and other shareholders. We see the role of secondary transactions in helping offer employee liquidity increasing over time.”