redBus, the company which got acquired for Rs 800 cr by South African media conglomerate Naspers is seeing senior level exits as many employees feel left out of the ESOP story, according to sources. At least a dozen senior employees of redBus have quit the company and a few more are on their way out.
A large part of this exodus may be – from what we’re hearing – because of the fact that employees aren’t pleased with the way Employee Stock Options were dealt, as most of the tangible gains from the acquisition have gone to the founding team (+ few very selected ex-employees, not more than 3 in number). That is, the core group and not employees, who must have obviously been sold the dream as well.
redBus founder & CEO Phanindra Sama has not yet responded to an e-mail sent by us on Monday.
In usual cases, when an offer is on the table, companies resort to accelerated vesting where options are quickly converted to shares and employees make money at the time of acquisition. The other option is that the acquirer recognizes the existing ESOP scheme and gives the employees what is called “employer securities,” in the form of preferred or common stock in the acquiring company. In this case, it appears that the latter option was chosen.
Of course, any M&A brings its own integration challenges as well as those of sustaining the team, but the redBus story is a bit different. Some of the employees who have quit the company are a bit disgruntled because they feel that the founding team let them down, especially since this is juxtaposed with the extensive PR and the excellent image the company and founders have amongst the media and in the ecosystem.
Do you blame the acquiring company?
Maybe not. While everybody is trying to maximize their gains, employees totally rely on founders for the judgement. Acquiring company’s intention is not to be good to employees during the deal phase.
What does that mean for startups?
The entire ecosystem is built on trust. We are sure that redBus will certainly manage to fix the current exodus issue, maybe the lesson here is that founders need to lay down the ESOP rules clearly (and stick to it).
Of course, startups (and even established companies) will find it difficult to sell ESOP value to potential candidates after this (not that it was easy earlier). In fact, some of the companies are now going extra mile to convince their teams that ESOP does have value and if the company gets acquired, this is how the payout will be made.
The Truth About ESOPs (In Indian Startup Context)
In Indian startup ecosystem, ESOP$ hardly have any (perceived) value. While the ecosystem has seen some exits in the last one year, very few employees (especially non-core team members) have monetized ESOPs, i.e. we have very less number of case studies to prove that ESOPs are actually a big deal (read : The Dark Side of ESOPs).
For sure, core team members should definitely monetize ESOPs, but if it’s only about that, then how can you sell the dream to those who aren’t part of the core team? In fact, read from my personal experience (Do not care about ESOPs? Read this 70X Success Story), where I wasn’t even part of the core team and monetized ESOPs. Apart from creating confidence in the ecosystem, it also helps in building a ‘Pay it Forward’ culture.
And while it’s important to celebrate success (exits/M&A etc), it’s also important to look at the overall value being created. For startups, the time to lay down these rules clearly and transparently is NOW.
PS: We have reached out to redBus to get some clear numbers around this, but haven’t heard back. We will update the piece when we get an update.
[Jayadevan and Sameer contributed to this article.]
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