Microsoft did it and promised employees million-bucks every 4 years till 1990; Infoscians did it and even their drivers reaped million rupees; Google did it and made the rank-and-file multi-millionaires. Sharing wealth was never this beautiful in the tech world until the employee stock option incentive came out colorfully from the doors of Microsoft. It is said that the best thing that ever happened to ‘employee motivation’ is the introduction of ‘employee stock options’. ESOP (employee stock option plan), as an acronym, ruled the 90s and is holding the 2000s in a deadly charm—industry watchers argue that it is irreplaceable by any other incentive. It squeezed the best out of average, increased man-hours twofold, put many individuals on the pedestal and jettisoned some good companies on to the world’s podium. In short, it made the 90s the rock and roll era of the tech industry across the world.
India too has witnessed great employee millionaire stories—all under-cover and secret. This issue not only has a tryst with the gutsy guys who could spill some ESOPs beans, but also tell tales— or is it the tricks? —of growing rich. Surprisingly, in the most ethical and logical manner in which money was ever thought to be earned. Interestingly, all ESOPs did was to add some democracy into the proprietary business of ownership. It made employees owners; it aligned the goals of owners and employees.
Way before, way too before, the co-founder and Yahoo! chief Jerry Yang, CEO Terry Semel and a coterie could plan a secret trip to India in May 2006; there were a bunch of Yahoo! India employees planning to put in their papers.
Obliviously to one another, they all had a similar interest: Startup. While Jerry’s gang wanted to acquire some, these outgoing employees wanted to found one. Money wasn’t a hitch for either’s priorities. Yahoo, as it is, had the muscle and these young tech junkies had their stock options!
You might ask what is in a stock option? And wouldn’t believe that Rajesh Warrier, and Ruban Phukan, ex-yahooites and co-founders of the one-year-old RHR Networks, Bangalore, will depend on that stock money to sustain their livelihood for the next three years. “We are sustaining on the money we made and waiting to see how our new venture performs,” says Phukan, 27, the youngest of all. RHR currently earns its entire operating cost by the Google Adsense on its site.
Warrier and Phukan, then tech leads at Yahoo! made a fortune nine times their annual CTC (cost to company or salary) just by selling their options at the end of four-years at work.
Delving into some job portals will tell you that a four-years experienced tech lead earns Rs. 10 lakh as annual salary in an MNC. Now multiply that with nine and you get a figure of Rs. 90 lakh each. The duo, along with Himanshu Nautiyal, is running three independent websites (Apnamarket —classified ad, Bixee—unique job portal and Pixrat—media bookmarking) catering to the vast young population in the country, which they intend to consolidate under their RHR banner going forward. As they drudge in their 8 by 10 office space in the north of Bangalore, there is confidence that they will surely be in Yahoo’s radar the next time there is a secret visit.
Down south in the swanky area of Rest House Road, Ashish Vikram the Managing Director of Oat Systems is sluggishly talking about what ESOPs could do to employees. He’s not wearing a savile row suit nor does he talk about the money he’s made. With a little shilly-shallying he gives an approximation, “Double the entire money I earned in my 15 years.” To get some understanding he made 45 years of his salary in 15 years. Hold on. Vikram hasn’t earned that money entirely as an MD at Rational—his previous company. He started his career as a software engineer in 1989 and worked with Rational for eight-years before he came to India to establish its center. Then the company went public in the U.S and finally got acquired by IBM in 2004. After which he moved to another private company, Oat Systems, as the country head.
One thing interesting in ESOPs in a startup is its grant price—the concession-rate at which employees get to buy stock from their vested option. Often the difference between grant price and market price is huge, unlike a public company, which can only reduce its stock price a little to offer its employees. Shaunak Dalal, an ESOP specialist and the CEO of ESOP Paradigm, explains, “Let’s say a private firm offers stocks. Its share price starts with 50 cents a stock and often the promoters hold on until it goes to $15 before taking the company public or filing IPO.” Let alone the value, private companies are known to offer four times more shares in comparison to a public company.
Srinivas Duvvuri, a senior manager at Cendura India, Hyderabad, recollects the ecstatic time he had at Hyperion, his previous employer. “We went public in 1995 and the money was four times my CTC,” he says. If Duvurri had come to India then just with his stock money, he could have still managed to stay in a Banjara Hills’ posh bungalow. Today at Cendura the junior folks look up to him every time the share price goes up and down, and clarify the wildest of doubts they have. But Duvvuri recollects how important a role ESOP played as a motivator on all Hyperion employees.
“Until Microsoft started ESOPs in the 1980s, only a few founders in the tech industry had found the stairway to wealth,” says Srikanta Krishnaswamy, a senior independent Chattered Accountant and a faculty of National Law School of India University. When Microsoft was a startup, the only way to motivate its employees was making them feel like owners of the company. The idea was, employees when given a percentage of ownership will look at the company’s growth as their personal growth and would work more, which they did––working more than 100 hours a week. “It was like giving the employees a huge deflated balloon and asking them to blow their best into it. The more air they blew, the bigger the company got,” says Krishnaswamy. Soon Venture Capitalists heralded a new dawn. They propounded the theory of wealth–sharing by employee stock option pool. Accordingly most companies kept aside an approximate of 15 percent of stocks to employees alone.
One of the earliest go-getters companies in India was Infosys, whose drivers-turned-millionaires we have all heard. However, there are not many Initial Public Offering success stories heard after that. Also, with very few Indian tech startups taking the IPO route, acquisition took the center stage bringing hope to employees holding the ESOPs. Interestingly, some of the tech companies in India don’t offer stock options to all its employees, but only the experienced. However, some like Kris Lakshmikanth, CEO and Managing Director of Headhunters Inc attribute this to the acquisition rate in the country. “Lower number of tech IPOs in India is invariably because of the acquisition route that multinationals are taking on our good companies.”
It is in these acquisitions that some employees have found wealth serendipitously. For example, the popular 2005 acquisitions of Hughes Software, Deccanet Designs and Emuzed by Flextronics brought some real chunk of money to its employees. Ram Kishore, one of the first employees at Emuzed, and a senior software engineer made a fast buck four times his CTC, implying he now says has brought lot of financial stability in life. A search on some job portal with his experience will tell you he could have earned about Rs. 15 lakhs, which implies he garnered close to Rs. 60 lakhs in a short time. Emuzed, an Indian startup, even contemplated an IPO route.
Amit Agarwal, erstwhile Airespace now Cisco employee, too made money just two years into his career as a junior engineer. Alumni of Visveswaraya Technology University (2003), Agarwal got into Airespace in June 2004 after a year’s work experience in Tata Elxsi. In 2005 Cisco acquired Airespace and all the 20 employees at Airespace became Cisco employees. Agarwal’s stock option is now trading as Cisco’s on the NASDAQ. Two years in Cisco, he has not sold his stocks, but at the current market price it can earn him a booty. Worth so much that he exclaims “never to have seen at once in my career.”
For a few Indians who went abroad to work for startups this get-real-rich story of ESOPs is an old grandma’s tale. “They often narrate their stories of success or failure among their Indian colleagues and help them understand the concept better,” says Lav Nigam, the Managing Director of Cendura India. Gautam Shyamantak, now at Razorsight, is also popular for his Trigo-story. Shymantak joined Trigo, U.S, in 2002 as a Technical Architect. He focused so much on technology initially that he confides to have had a vague understanding about ESOPs. But in 2004 IBM acquired Trigo, and there were monetary talks happening across his office. Shymantak considers ESOP as a good compensation, but rues to have known nothing about it in the early days.
Rama Rao Sreemani, the co-founder and India head of HelloSoft is optimistic that ESOPs trend will surely be a strong motivator in India among the startups. “We’ve had all the big companies in the country, now startups will also increase manifold,” he says. And those startups without the brand power or even the opulence to offer a fat salary will have to beckon the best-breed of engineers with ESOP as baits. Dalal, from his Mumbai office too is concurring the same. “In the last two years our clients addressing the ESOPs issue have gone high. We get eight to ten companies enquiring for ESOPs every month,” he says. In the coming years ESOs will become a commonality in every employee’s appointment letter.
With ESOP wave engulfing the whole startup and private companies there are few distinctions made between employees in India and the employees overseas. “If the roles and responsibilities of two employees are same then we offer similar option package with a little difference in range irrespective of where they work,” says Gopal Rangachary, Financial Controller at July Systems. A range that might be narrowed as the industry grows?
6-stages of stock options (in private firms)
Employee stock option is an option vested with employees to purchase (exercise), or not to, the shares in the company they are working for at a predetermined price or the grant price.
A process by which employees accrue non-forfeitable right over their options.
Going by the SEBI (Securities and Exchange Board of India) rules, every company should have at least one year of vesting period for employees to exercise the options. Usually in the private tech companies the standard is to have four years of vesting time. Some companies use it as a retention tool alongside wealth creation and wealth sharing. Unvested options usually go back to the employee pool of stocks.
Every company will have a certain pattern in issuing their options. After a year of vesting it is usually an industry practice to offer 25 percent of that stock option as package. And then on, vesting will happen either monthly or in some companies annually.
Ex: Let’s say you have a package of 1000 options. After the first year you vest 250 stocks (it is your absolute right to buy and sell them). Then in the second year you get an installment of 20 stocks a month or 250 a year.
In most tech companies, rank and file of the organization gets stock options. In some that don’t, it’s earmarked for the experienced and star performers. Every year there are performance appraisals done based on which there are more options offered.
Once you have vested the stocks you can sell it whenever you want to, back to your company. Or some times even to your colleagues in the company at a price negotiated by either considering the price your company could offer. You get your money after every year’s vesting. But if you leave the company before one year then you make no money. If your exit is after a year or two’s time then you make money on vested options while your future vesting stops immediately. However, you can hold the vested stocks for a specified period after leaving the company.
Third party valuators, nowadays, mandatorily do valuation of a company’s worth. Startup companies openly talk about their worth during the interview process. And all one has to do is just ask for its worth.
After the valuation the grant price is derived. The Board of Directors decides the grant price. It changes with every Board meeting. The Board decides even market price when it comes to selling the stocks.
PANEL 2: Things you ought to know
1. Employee stock option plan is different from Employee stock ownership plan. Where there is ownership there is purchase, but private companies don’t have purchase plans.
2. India is the most tax-friendly country in the world when it comes to stocks.
3. People still take significant salary cuts for a fat ESO package.
4. Stocks are now being granted equitably across the globe.
5. Even private companies offer dividends on your employee stocks.
6. You are not taxable when you exercise your options, but only when you sell it.
7. You don’t lose any money in stock options.
8. Every vested stock has an expiry date.
9. Bonus is different from ESOs.