Oct 5, 2022
Orange Health, CityMall & Niyo announce Buyback Programs while Q3 sees a sharp drop in Employee Liquidity
Sharp drop in Employee Liquidity: $200+ million in Q3 2021 vs <$20 million in Q3 2022
2022 was an eventful year for the startup ecosystem and had its share of ups and downs. From an ESOP Liquidity perspective, it was a challenging one for both startups and employees. On one hand, as companies hustled to stay afloat, extend runways, and cut costs, employees had limited avenues to liquidate their ESOPs compared to the record liquidity they saw in 2021.
2022 started with the momentum and optimism that it carried forward from 2021 – which saw record, unprecedented flows to employees in terms of ESOP liquidity (~$440 million). The first two quarters lived upto to the optimism with close to $250 million worth ESOPs liquidated across 30+ programs run by startups. However, Q3 and Q4 saw numbers sharply declining with only $30 million in liquidity offered to employees (this number excludes companies that announced undisclosed liquidity programs as well as the large windfall payout by Flipkart which strictly doesn’t qualify as an ESOP buyback and remains to be executed).
These charts give a sense of the sharp fall in ESOP Liquidity as mentioned earlier.
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Below is also the list of the top ESOP Liquidity Programs of 2022:
The last month of Dec 2022 did see some ESOP related activity in terms of Buybacks and ESOP pool expansions. Shipsy and Flipkart announce ESOP Buyback plans leading to wealth-creation opportunities for many. Alongside, NASSCOM suggests various tax reform for Union Budget 2023 to strengthen the ESOP culture within startups.
According to Verse Innovation's regulatory filing with the Registrar of Firms (RoC), the board of directors has approved a special resolution to grant 5,95,121 employee stock options (ESOP) to the staff of its subsidiary companies.
Shipsy a SaaS-based logistics management platform, having a strong presence across India, Middle East, and Southeast Asia and backed by investors such as A91 Partners, Z3 Partners, Info Edge, and Sequoia Capital India’s Surge, announced its maiden ESOP Buyback program for employees who have completed at least one year of full-time employment.
The industry body has urged that the government let startups without an Inter-Ministerial Board Certificate (IMB certificate) the option of deferring ESOP tax, subject to "acceptable conditions," but should not require each business to apply for approval.
Employees of startups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) should have access to the deferment facility. Additionally, it was suggested that only Indian residents who pay taxes should be given access to qualifying ESOPs, and that all employees who get them should be subject to the same ESOP provisions. Additionally, NASSCOM advised that the government set up a procedure for expediting IMB certification.
To sum-up, 2022 started off on a great note, however reality hit soon, thanks to the global macro, geo-political factors that has squeezed liquidity from the markets which has impacted the frequency of ESOP buybacks too. While the prevailing situation will definitely continue for a couple more quarters in 2023, the situation is expected to improve as the India and SEA ecosystem VCs are sitting on record amount of dry powder and it’s just a matter of time when the liquidity flows into startups will hit the usual levels. Until then, companies will adopt a cautious stance and will seek to conserve cash as much as possible.
That said, many companies have recently announced ESOP pool expansions and including more employees in their ESOP programmes as a means to incentivize and retain their top talent while not pinching their cashflows. Thus, ESOPs are offering an efficient instrument for companies to achieve their talent retention objectives.
Are you looking to setup or revisit your ESOP program to attract and retain talent? We can help you to create an ESOP Policy that your employees would love. Do reachout to us.
