BYJU'S, Swiggy, Meesho valuation cuts: How will it impact ESOPs?

The valuations of many major Indian startups have been slashed by VCs and investors in the past few weeks. Swiggy’s valuation was cut by Invesco, BYJU’S valuation was slashed by BlackRock, and Meesho’s valuation was reduced by Fidelity Investments.  This cutback is also going to impact the value of the ESOPs employees at these startups are entitled to.

ESOPs, or Employee Stock Ownership Plan, have lately become an important part of employee remuneration in startups. Employees are offered stock options in the company which they can buy at a lower than market price after completion of vesting period. Gaurav VK Singhvi, angel investor and founder of We Founder Circle, explained how ESOPs are valued. 

Singhvi explained, “When a startup experiences a decrease in valuation, it directly affects the value of ESOPs granted to employees. ESOPs are usually granted with a specific strike price, which represents the price at which employees can purchase company shares in the future. This strike price is typically determined based on the company's valuation at the time of grant.

In the event of a decrease in the startup's valuation, the strike price of the ESOPs remains the same, but the market value of the shares decreases.”

This means, when employees exercise their ESOPs and purchase shares at the strike price, their expected potential profit or financial gain may be significantly reduced.

Experts and industry insiders point out that this drop in financial gains via ESOPs might make it difficult for Indian startups to retain talent. CIEL HR’s MD,  Aditya Narayana, told Business Today, “A drop in the company's valuation estimates reduces the value of the ESOPs held by the employees. This not only impacts the retention rate but also dents the attractiveness of the employer brand.”

Indian startups have also witnessed a spree of layoffs. “It has already been a dampener for employees working in startups in India because of the layoffs and funding winter. Around 12,000 employees from nearly 70 startups have been laid off since the start of 2023. A cut in their valuation further affects the morale of employees.”

Daya Prakash, the founder of HR consultancy firm TalentOnLease, pointed out that in the short term, the cutbacks in the valuations will make it difficult for startups to attract top talent.

“One immediate concern from reduced valuations is the potential impact on employee retention as well as attracting talent. Startups have traditionally used ESOPs to attract and retain top talent but the reduced value of ESOPs can undermine employees' long-term financial incentives and loyalty to the organisation,” said Prakash.

Yagnesh Sanghrajka, co-founder and CFO at 100X.VC highlighted that if employees have faith in the long-term growth prospects of their employer, they can still benefit from the short-term cuts in the company valuations.

He said, “Employees who are confident in their company's long-term prospects can hold on to their vested ESOPs and in fact take advantage of the reduced valuation rounds to cut their tax outgo on vesting.”

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