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Major Boost for Reverse Flipping: Indian Startups Coming Home

Posted on by Treelife

In recent years, a significant number of Indian startups have chosen to incorporate their businesses outside India, primarily in locations like Delaware, Singapore  and other global locations. This trend, known as “flipping,” offered advantages like easier access to foreign capital and tax benefits. However, the tide is starting to turn. We’re witnessing a growing phenomenon of “reverse flipping,” where these startups are now shifting their bases back to India.

This shift back home is driven by several factors, including a booming Indian market, attractive stock market valuations, and a desire to be closer to their target audience – Indian customers. To further incentivize this homecoming, the Ministry of Corporate Affairs (MCA) has recently introduced a significant policy change.

MCA Streamlines Cross-border Mergers for Reverse Flipping

The MCA has amended the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, to streamline the process of cross-border mergers. This move makes it easier for foreign holding companies to merge with their wholly-owned Indian subsidiaries, facilitating a smooth transition for startups seeking to return to their roots.

Key Takeaways of the Amended Rules

Here’s a breakdown of the key benefits for startups considering a reverse flip through this streamlined process:

  • Fast-Track Mergers: The Indian subsidiary can file an application under Section 233 read with Rule 25 of the Act. This rule governs “fast-track mergers,” which receive deemed approval if the Central Government doesn’t provide a response within 60 days.
  • RBI Approval: Both the foreign holding company and the Indian subsidiary need prior approval from the Reserve Bank of India (RBI) for the merger.
  • Compliance with Section 233: The Indian subsidiary, acting as the transferee company, must comply with Section 233 of the Companies Act, which outlines the requirements for fast-track mergers.
  • No NCLT Clearance Required: This streamlined process eliminates the need for clearance from the National Company Law Tribunal (NCLT), further reducing time and complexity.

The Road Ahead

The MCA’s move represents a significant positive step for Indian startups looking to return home. This policy change, coupled with a thriving domestic market, is likely to accelerate the trend of reverse flipping. This not only benefits returning companies but also strengthens the overall Indian startup ecosystem, fostering innovation and entrepreneurial growth within the country.

Do you think it’s time to take your startup global?

Posted on by Treelife

Expanding your startup into foreign markets presents a global business expansion opportunity that can be daunting yet rewarding. It’s important to keep an informed eye on regulations, compliance, and technical aspects of the countries you want to venture into. The reasons for international business expansion are many. However, before extending your global footprint, startups must address the following key compliance considerations to be global business ready:

International Investment Regulation Compliance

Establishing lawful compliance with investment regulations and rules is a key factor in setting up a business internationally. Private capital investment structuring is vital for raising funds through Alternative Investment Funds (AIFs). Startups should also consider bilateral and multilateral agreements that promote foreign investment and provide substantial protection to investors. The growth of international business is driven by these agreements and policy announcements that encourage businesses to invest in foreign markets, such as the Indian government’s recent directive allowing Indian startups to offer public listings in foreign markets.

CapOne Research Case Study

CapOne Research is a thriving fintech startup that launched in 2016 and uses blockchain and AI to design payment systems. The company’s founder initially planned to incorporate the business in the US but faced roadblocks with visa compliance and structuring expenses.

Instead, CapOne took advantage of Estonia’s Startup Programme, gaining access to EU-based venture capital markets and angel investors. The ease of business and personnel availability were key factors in the company’s growth. CapOne’s experience is a valuable lesson in understanding the opportunities and challenges of international business.

Data Protection and Policy

Data protection and policy regulations vary between countries. It’s essential to adhere to strict data privacy guidelines and ensure proper security measures are in place. Incorporating the latest advancements in technology, such as blockchain and AI, to design payment systems provides exceptional opportunities for global business expansion.

As companies handle and process personal data, it is crucial to ensure strict compliance with processing guidelines under EU-GDPR privacy regulations, which are now considered a global standard for privacy protection. To comply with these regulations, business entities that handle personal data must follow specific consent, disclosure, and collection mechanisms. Moreover, these regulations may restrict the transfer of data outside the region from where it was collected.

Data privacy law and compliance are at the forefront of not just the technology industry but also the service and sales industry to ensure the free, fair, and safe processing of sensitive consumer data. Indian startups such as Paytm have taken positive steps to match global giants like Google and Facebook in ensuring data welfare and protection.

Paytm and Privacy Case Study

Paytm recognizes that in an era where data is ‘the new gold,’ regulatory authorities must create a strong consumer data protection framework that respects the privacy concerns of citizens. Paytm deems all financial data (KYC, Aadhar, and other identification-related biodata) as ‘Critical Personal Data’ and takes measures to store and process the same within India alone.

Likewise, startups wanting to expand to foreign jurisdictions can expect to deal with regulations that enforce cooperation and compliance in matters of private data. Paytm has expanded to Canada and Japan and is compliant with related data privacy regulations – Canada’s Personal Information Protection and Electronic Documents Act (PIPEDA) and Japan’s Act for Protection of Personal Information (APPI).

To summarize, the basic tenets that an enterprise must follow to ensure data protection include accountability, consent, limitation of use, disclosure, and retention, and data security systems.

Human Resources & Labour Law Compliance

Startups expanding into new markets must comply with local labour laws regarding employment contracts, minimum wage, and working hours. Companies must also be mindful of cultural differences in regards to communication and working styles. The advantages of expanding a business internationally are vast, but understanding the challenges and opportunities of international business is critical to success.

Each jurisdiction has specifics and standards on HR and Labour law that need to be incorporated into employee contracts and other agreements on personnel and conduct. Anti-Corruption policies and Insider Trading Disclosure mechanisms need to be in place to regulate fair and lawful business conduct. Startups that enter new countries often take advantage of ‘floating employee’ arrangements that constitute a network of consultants and independent contractors.

Intellectual Property

Intellectual property protection laws, such as patents, trademarks, and copyrights, differ between countries. Startups must protect their intellectual property by adhering to proper regulations to prevent infringement. Avoiding problems in international business is possible by investing in the right legal expertise and understanding the comprehensive international expansion strategy.

It is important to refile for intellectual property, such as trademarks, copyrights or patents, in a new territory to ensure global recognition. The business may either apply for the same individually in each country or go for a comprehensive filling such as that offered by the EU Intellectual Property regime that holds valid for all European Union countries. Trademark incorporation and registration in North America, as done by giants such as Flipkart and Myntra, is a route preferred not only to ease tax burdens in India but also to increase valuation and reputation in business.

Case Study

A very well-known startup in India recently started expanding in the UK and posted vacancy ads on LinkedIn. The public, at large, including some prospective recruiters mistook this Indian startup for a UK-based startup that had a similar sounding name. This came into the eyes of the UK-based startup and rounds of to and fro legal notices were ensued on the Indian startup. This delayed the Indian startup’s expansion plans and also cost a substantial legal fee on top of settlement offers for coexisting in the UK market.

Tax Obligations

Startups must also be aware of tax laws and obligations when operating in a foreign market. These can vary significantly depending on the nature of business and location. Engaging with authorities at different levels including legal and taxation experts will help startups establish a scalable international business expansion.

Tax structuring and management may help minimize tax obligations. Ensure that taxes deducted at the source such as employee payment and post-sale/service VAT are dealt with in a timely manner. Different geographies are subject to different rates and methods of taxation, with jurisdictions even incentivizing small to medium business entities that can take advantage of international agreements between states that support and ease business activities.

The Vodafone Tax Case: A Case Study on Global Expansion & Taxation

Vodafone International, a leading telecom giant based in Amsterdam, acquired Hutchison Telecommunications International Limited (HTIL), based in Hong Kong, by acquiring its subsidiary, CGP Investments (Holdings) Ltd based in the Cayman Islands. However, Vodafone’s entry to the Indian market through Hutch brought them under the Indian Income Tax authorities’ radar for Capital Gains Tax on CGP. As CGP was not based in India but held essential Indian asset companies in operation, a legislative change introduced in India, called ‘Retrospective Taxation,’ presented Vodafone with a liability of over INR 22,100 Cr.

Vodafone faced a prolonged legal battle in the highest Indian courts before the recent International Tribunal hearing. Vodafone was able to plead protection under India-Netherlands Bilateral Investment Protection Agreement (BIPA), and the tribunal ruled that India had breached its ‘guarantee of fair and equitable treatment.’

Acquisition Opportunities, Joint Venture/Cooperative Relationship

Exploring acquisition opportunities or joint ventures with established businesses in foreign markets can help startups navigate local regulations and establish a strong foothold in the market. Acquiring the right companies with the right international business expansion examples create both opportunities and challenges of international business from which startups can learn.

Acquiring foreign entities in similar fields to allow for expansion is now a popular way of global expansion for India’s biggest startups. One example is when Oyo acquired Amsterdam-based Leisure Group for €369.5 Mn, while Byju’s acquired US-based ‘Osmo’ for $120 Mn, making it the world’s biggest EdTech company.

InMobi Goes International: A Case Study

InMobi is a mobile advertising company that rose from humble beginnings in 2007 as an SMS-based service to become India’s first unicorn startup company. To extend its growth and resources, InMobi sought to operate in new markets by expanding resource and technical partnerships.

In 2018, InMobi strategically partnered with telecom giant ‘Sprint’ for digital marketing and data services to make inroads in the US market. Setting up offices in locations such as Kansas City and San Francisco, it acquired Pinsight Media, the mobile advertising branch of Sprint that operates and advertises across verticals, including consumer goods, retail, entertainment, and finance. The acquisition of Pinsight offers InMobi an infrastructure to combine network mobile services and integrating customer information, helping companies better target ads on smartphones to the right audiences. Naveen Tewari, Founder and CEO at InMobi, said, “this industry-first acquisition allows InMobi and Sprint to work on our respective strengths together and provides a global template for partnerships between advertising platforms and telcos.”

Conclusion

Expanding your startup globally can offer significant opportunities and pave the way for the growth of international business. Understanding the necessary compliance and regulations upfront is critical. Incorporating in business-conducive territories or exploring a startup accelerator program can be viable options for startups looking to go global. The opportunities and challenges of international business are numerous, but with the right international expansion strategy, startups can find success.

FAQ’s

Q: What is the major reason for international business expansion?

A: The major reason for international business expansion is to increase the market share, gain new customers, exploit new opportunities and diversify the risks involved in operating a business.

Q: What is an international business expansion example?

A: An example of international business expansion is when a company based in the United States establishes store locations in other countries such as China, Japan, and Italy.

Q: What are the four types of international business?

A: The four types of international business are exporting, licensing, franchising, and direct investment.

Q: What are the 5 stages of international business?

A: The five stages of international business are no direct foreign market involvement, export via an independent representative, the establishment of sales subsidiaries, production and sales subsidiaries, and a global service provider.

Q: What to consider when expanding a business internationally?

A: When expanding a business internationally, factors to consider are market conditions, cultural differences, currency exchange rates, taxes and tariffs, language barriers, legal and regulatory requirements, and logistics and infrastructure.

Liquidation Preference in Venture Capital Deals

Posted on by Treelife

What is Liquidation Preference?

A Liquidation Preference provision sets out the level of priority that an investors’ shares receive for the purpose of recovering their initial investment (or a multiple thereof) upon trigger of a liquidation event. A liquidation event typically includes winding up, sale of substantial assets of a company, change of control, merger, acquisition, reorganization and other corporate transactions, among others.

How Liquidation Preference Helps an Investor?

1Recovery of InitialA liquidation preference allows the investors to recover at least their initial investment in a company.
2Multiple on the Initial InvestmentA liquidation preference provision also allows the investors to earn a multiple on their initial investment, i.e., instead of 1x, investors may seek 2x or more, if so agreed.
3Distribution in order of seniorityA liquidation preference clause allows the distribution of the proceeds to be in an order of priority on the basis of the series of securities held by the investors.

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Types and Mechanics of Liquidation Preference

Types of Liquidation Preference

Type of LPParticulars
Non-participating Liquidation Preference
1xAllows the investors to recover only their initial investment in the company.
1x or pro-rata, whichever is higher* (single dip)Allows the investors to recover their initial investment or entitles them to the proceeds from the liquidation event, basis their pro-rata shareholding in the company (on an as-if converted basis), whichever is higher.
Participating Liquidation Preference
1x (double-dip)Allows the investor to recover their initial investment (or a multiple thereof) in addition to a right to participate in the remaining proceeds basis their pro-rata shareholding in the company.

*Note:The multiple on the liquidation preference may be more than 1x and the amount of distribution of the liquidation preference shall be determined basis such a multiple.

Let us understand the mechanism of different types of liquidation preference through the below illustration:

Investment AmountINR 10cr
Percentage shareholding in the Company10%

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Scenario 1: Non-participating liquidation preference

1x or pro rata, whichever is higher

Total Liquidation proceeds*Investors’ liquidation entitlement (2x)Investors’ liquidation entitlement (pro-rata)Actual entitlement
INR 20crINR 10crINR 2crINR 10cr.
INR 200crINR 10crINR 20crINR 20cr.

*Note: The total liquidation proceeds are the total proceeds from a liquidation event which are subject to distribution between the shareholders.

2x or pro rata, whichever is higher

Total Liquidation proceeds*Investors’ liquidation entitlement (2x)Investors’ liquidation entitlement (pro-rata)Actual entitlement
INR 20crINR 20crINR 2crINR 20cr.
INR 400crINR 20crINR 40crINR 40cr.

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This form of liquidation preference is most desirable as, while it allows the investors to recover their initial investment, it also enables them to take advantage of the upside in case the larger proceeds are accumulated from a liquidation event.

It is however, not recommend signing up for a multiple on the investment amount.

Scenario 2: 1x (participating liquidation preference)

Total Liquidation proceeds*Investors’ liquidation entitlement (1x)Investors’ liquidation entitlement (pro-rata)Actual Entitlement
INR 20crINR 10crINR 2crINR 12cr
INR 500crINR 10crINR 50crINR 60cr.

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While this may seem like a desirable form of liquidation preference, in the event the structure of a liquidation is not pari passu, i.e., in case the liquidation clause provides for a seniority, this may lead to disadvantage to the holders of equity shares (in most cases, the founders).

Conclusion

In conclusion, while liquidation preference is a crucial right for the investors, it is important for the founders to be mindful about the construct of this provision.

Early stage founders are recommended to consider the 1x non-participating liquidation preference, preferably provided in Scenario 1. Excessive or stringent liquidation preferences can deter future investment rounds and put the founders at risk of reduced share in the liquidation proceeds.

PhonePe Reverse Flip to India: Unraveling the Strategic Shift and its Impact

Posted on by Treelife

First Published on 21st August, 2023

The Reverse Flip

What is Reverse Flip?

“Reverse flip” or “re-domiciliation” refers to a corporate restructuring process in which a company changes its country of domicile or legal registration from one jurisdiction to another.

Background

  • PhonePe was incorporated in 2015 in India
  • In April 2016, PhonePe was acquired by Flipkart. As part of the acquisition, PhonePe flipped its structure to Singapore
  • In 2018, PhonePe became a part of Walmart after it acquired Flipkart
  • In October 2022, PhonePe announced that it has moved its domicile to India (reverse flip) for following key reasons:
    • PhonePe wants to focus on India markets for the next couple of decades. PhonePe is a digital payments company that operates primarily in India. By redomiciling to India, PhonePe can be more responsive to the needs of its customers and partners.
    • The Indian government has been tightening regulations for digital payments companies in recent years. By redomiciling to India, PhonePe can be more easily compliant with these regulations.
    • To be better positioned for an IPO. PhonePe is expected to go public in the next few years

What Happened?

Steps undertaken

  • PhonePe moved all businesses and subsidiaries of PhonePe Singapore to PhonePe India directly
  • PhonePe created a new ESOP plan at India level and migrated all group employees to this new plan
  • IndusOS, owned by PhonePe, also shifted operations from Singapore to PhonePe India

Key Consequences of Reverse Flip to India

  • Lapse of accumulated losses of USD 900 million
    • PhonePe stands to lose the chance to offset its USD 900 million (~INR 7,380 crore) of accumulated losses against future profits as shifting the domicile from Singapore to India is viewed as a restricting event under Section 79 of the Income Tax Act, 1961
    • As per the provisions of Section 79, a company is not allowed to carry forward the losses if the change in beneficial ownership of shareholding of more than 50% occurred at the end of year in which losses were incurred
  • Reset of ESOPs to zero vesting with 1 year cliff
    • All employees of PhonePe were migrated to the new India level ESOP plan which stipulates a minimum 1 year cliff.
    • Thus, the employees vesting status was reset to zero with a 1 year cliff
  • Tax payout by investors of almost INR 8,000 cr
    • PhonePe investors, led by Walmart, sold their stake in the Singapore entity and invested in PhonePe India
    • This means that there was a capital gains tax event in India for the the investors leading to a tax-pay-out of almost INR 8,000 cr

Other Startups looking at Reverse Flip

  • Razorpay is in process to move its parent entity from the US to India
  • Groww is planning to move its domicile from the US to India
  • Pepperfry has reverse flipped their structure to India via amalgamation

Source:

https://economictimes.indiatimes.com/tech/technology/phonepe-shifts-headquarters-from-singapore-to-india/articleshow/94621544.cms

https://www.bqprime.com/business/after-phonepe-razorpay-kicks-off-reverse-flipping-process

https://en.wikipedia.org/wiki/PhonePe#:~:text=10%20External%20links-,History,the%20CEO%20of%20the%20company

https://inc42.com/features/unicorn-desh-wapsi-reverse-flipping-is-the-new-startup-sensation

Compliance with the Indian Digital Personal Data Protection Act, 2023

Posted on by Treelife

For: B2B SaaS businesses

The Digital Personal Data Protection Act, 2023 (“Act”) is intended to safeguard and protect digital personal data, and (inter alia) govern the manner in which it can be collected, stored, processed, transferred, and erased. The Act imposes requirements on data fiduciaries/collectors and data processors, as well as certain duties on the data subject/individual with respect to personal data.

“Personal Data” under the Act includes any digital or digitized data about an individual (including any data which can be used to identify an individual). This excludes any non-digital data, or any data which cannot be used to identify an individual in any manner (including in concert with any other data).

This document is intended to provide a summary of the obligations of B2B-based SaaS business, which arise from the Act.

An Overview

The key obligations of businesses towards complying with the Act include:

  • Identify the extent of Personal Data collection, storage and processing which your business undertakes, and how much is necessary.
  • Prepare notices for procuring consents from individuals whose Personal Data you collect, store, and process (including those individuals whose Personal Data has already been collected and/or is being stored or processed), specifying:
    • Type/s of Personal Data you will use;
    • The specific purpose/s you will use it for;
    • The manner in which they can withdraw consent or raise grievances; and
    • The manner in which they can make a complaint to the Data Protection Board of India.
  • Maintain a record of consents procured and provide the following rights:
    • Right to request for (i) summary of their Personal Data being used; and (ii) identities of parties to whom their Personal Data has been transferred;
    • Right to correct, update and/or delete Personal Data (unless required to be retained for compliance with law);
    • Right to redressal for grievances and complaints;
    • Right to nominate another individual to exercise their rights (in the event of death or incapacity)

Action Items

While B2B SaaS platforms have limited Personal Data collection, Personal Data can still be collected and processed in case of user accounts for individuals/employees/representatives of enterprise customers. Businesses can take the following actions towards compliance with the Act:

  • Data audit: Carry out an internal data audit, including identifying Personal Data collection, storage and processing requirements;
  • Limit Personal Data usage: Erase or anonymize Personal Data to the extent feasible to reduce the compliance and associated risks, or limit the Personal Data points which are collected;
  • Update your product to enable privacy rights: Businesses should therefore make available on the SaaS tool / platform functionalities to:
    • Issue notices for procuring consent for Personal Data collection, storage and processing prior to any such collection, storage or processing. These notices can be worded in simple and clear terms so as to enable individuals to know their rights, and should include language which clearly states that consent is provided for collection, storage, and processing (including processing by third-parties); specify the purpose/s for the type or types of processing. For example – in case the processing will be done for purposes A, B and C, consent will have to procured specific for each of A, B and C; mention that consent can be withdrawn
    • Request modification, correction, updating, or erasure of Personal Data. Other than any Personal Data which is necessary for providing the services (for example, corporate email IDs), all Personal Data should be subject to modification or erasure pursuant to withdrawal of consent.
  • Appoint person/s who can handle complaints, grievances, or requests from individuals. This can be an individual assigned specifically for this task or a team responsible for ensuring speedy response.
  • Implement technical measures to protect against and mitigate data breaches and their consequences. The Act requires fiduciaries/collectors to “take reasonable security safeguards to prevent personal data breach”, which can include cloud monitoring, penetration testing, ISO certification, etc., depending on the sensitivity and extent of Personal Data.

ESOP FAQ

Posted on by Treelife
  1. What’s the hype behind ESOPs?
  • Because of the tremendous competition in the startup world, acquiring and keeping staff is critical. And the only way to do so is to reward them for their contributions. Employee Stock Options (“ESOP”) are one type of compensation that many firms provide these days. The hype might be explained by examining the benefits from both the employee and the company’s perspectives.

For Employees:

  1. Boost employee morale by encouraging them to do better in their daily responsibilities.
  2. Increases staff retention and, as a result, minimises turnover.
  3. Savings on director salaries for a private limited business by giving a share of ESOPs as a component of salary.

For Company:

  1. Employees might directly hold shares in a firm and participate in its success.
  2. Can gain from riches by selling lucrative shares that were purchased at a lesser price.
  3. Encourages employees to do their best.

2. Why is it called ESOPs and does it differ from the stocks that a founder holds?

  • It is called ESOPs because it is an employee benefit plan that provides employees a share of the company’s ownership. Each qualifying employee receives a set percentage of the company’s equity shares at no cost to them.
Founder StocksESOP
Founder’s equity, sometimes known as founder’s stock, is a type of shares awarded to a company’s founders or early members. In actuality, founder’s stock is just common stock that has been distributed to the company’s founders.ESOPs are given to directors and workers as an incentive and as a retention plan. They do not constitute an obligation, and they are offered to workers in the form of a right to exercise their option to acquire shares.

3. At what stage of a company’s growth are the ESOPs most valuable for an employee?

  • The various stages of growth in the lifecycle of the start-up can be divided into:
  • Early Stage
    Companies are often less liquid in the early stages (seed and angel rounds). They might not have enough money to hire C-suite executives and other key staff who are essential to the company’s success. Founders should offer ESOPs aggressively in such circumstances since they will have a lesser cash component to offer. Grants from ESOPs can be substantial, thus policies should be flexible. At this point, the primary goal is to recruit personnel.
  • Growth Stage
    A startup’s business has expanded by the time it receives a Series A or B round of funding. Employees’ monetary expectations should be matched by founders, and ESOPs should be limited to the most valued employees. ESOP grants may be reduced, but cash components should increase. Employees should be granted ESOPs as a form of compensation. The retention of high-performing individuals becomes crucial at this point in the process. Employees who were not given ESOPs when they started must now be given ownership options if they are key players in the company.
  • Maturity Stage
    Startups reach a mature stage after raising a Series B financing. Both the cash component and the ESOP pool are most likely balanced at this point. Satheesh recommends that founders raise performance-based ESOP awards at this time. Because the monetary component is so large, ESOPs should only be issued when absolutely required. It’s also worth noting that the company’s valuation rises at subsequent phases, implying that each ESOP’s Fair Market Value (FMV) rises as well. As a result, entrepreneurs should take a balanced approach to the awards that should be given to workers based on their success.

From the above it is clear that no matter the stage ESOP are valuable for the employee. However while signing up for ESOPs the employee should ask the following questions:

  1. Is an Esop Scheme in place?
  2. Quantum of options You will get
  3. The value of the Options
  4. Liquidity and valuation of Shares
  5. How to decide between full-monetary salary hikes & ESOPs?
  • Although common sense would dictate that cash should be preferred over ESOPs, such a comparison may be difficult to establish because the predicted price of shares under an ESOP plan is often substantially greater than the cash component being provided. Furthermore, the option of opting for cash instead of an ESOP may not always be available.

If your company’s financial performance falls short of expectations, not only your pay but also your fortune will be jeopardised. As a result, only use your ESOP right to purchase shares if your company’s fundamentals are sound. The issue of taxation must also be examined. You must pay tax on the difference between the fair market value and the exercise price when you execute the option.

5. What are the things to look out for when offered ESOPs? What are cliffs & vesting periods?

  • The following things need to considered when ESOPs are offered:

i.   Is the exercise price fixed or based on the FMV (Fair Market Value)?

The exercise price of options can be whatever the corporation chooses when issuing the ESOP grant letter. Some firms use a minimal exercise price (for example, INR 10) while others choose an exercise price depending on the company’s latest round value. The greater the difference between FMV and exercise price at the time of ESOP sale, the more money you create.

ii. Is there a vesting schedule? Is it a one-size-fits-all approach, a back-loaded approach ,or performance-based approach?

When you participate in an Employee Shares Option Plan, you have the ‘option’ to acquire the company’s stock at the time of exercise. The procedure by which you obtain the right to acquire these stocks on a systematic basis or according to a pre-determined calendar is known as ESOP vesting. Think of the vesting schedule as a timetable by which you obtain the right to ESOPs. The most typical vesting plan is uniform yearly vesting over four years, which means that after the first year of mandatory ‘cliff’ vesting, you will get 25% of the total ESOPs guaranteed to you every year for the next four years.

iii. When you leave the company, what happens to your ESOPs?

Your unvested ESOPs are returned to the ESOP pool when you depart or your employment term ends, but you should be aware of how your vested options are treated. Here you must consider how much time you will have to consider your alternatives after resigning. Consider that if you just have a few weeks to exercise, you’ll have to pay a few thousands or perhaps crores of rupees to obtain possession of your shares. Most well-known companies let workers months or even years to exercise their vested options.

iv. When you exercise your options, what are the transfer restrictions?

There may be a clause in the ESOP programme that allows the firm or the founder to forcefully purchase back (call option) such shares at market price. A ‘Right of First Refusal’ or ROFR clause, for example, permits the business to review any sale or transfer offer you have received first, and only if the company agrees to waive the ROFR clause can you proceed with the sale or transfer of shares.

v. How does the corporation make ESOP liquidity available to employees?

Check the ESOP policy and grant letter to see how ESOP liquidity has been or will be made available to startup workers. Is this even brought up by the management? Remember that you will only profit from your ESOPs if a liquidity event occurs, such as a secondary transaction, repurchase, or ultimate IPO.

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