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Off-Topic: RIP, ESOPs. Thank you, Redbus.


Livemint has an inside story on the sale of Redbus.

The development is very sad for the startup ecosystem – because Redbus, at the time of exit, did not let its ESOP owning employees make money. Instead, their ESOPs were converted to ESOPs of the acquirers (Ibibo).

Read this article for more detail.

Update: I have received multiple inputs on this issue, and it seems the details are murky; it’s not entirely true that top management didn’t get anything. The deal they got, as per the above LiveMint article, was that the payout would be as their original vesting schedule (no cliff, no acceleration) but at the end of each financial year. That means Goel, the COO, who joined in October 2012, would only see his first vesting (10% of his allocation of ESOPs) in April 2014. And 20% in April 2015 etc.  While this is not great (why wait?) it is also not as bad as saying they wouldn’t make money at all. So some of my outrage has been tempered.

But regardless, for the sake of being fair and making people money, everyone in the deal – founders, acquirer and VCs – should have offered the acceleration to key employees. 

<end Update>

Why’s this bad? After all, even Whatsapp’s sale to Facebook is largely about giving Facebook shares to ESOP owners? But there lies the twist – obviously, the Facebook shares can be sold and have a price. Ibibo’s shares have no daily price, and no way to sell – effectively the ESOPs (which aren’t even shares of IBIBO.

Effectively what happens? The ESOP owning employees see no money. Maybe they will if they hold the shares, but right now, nothing.

And that is bad only because: the founders saw money. The investors saw money. Someone made a truckload, and the ESOP owners, nothing.

Update: If you thought maybe the founders got stock, here’s the extract from Naspers’ report (Naspers owns Ibibo, and is a South African listed company. 1 Rand = about 5.5 to 6 INR)


(Let there be no confusion that the founders and VCs did make real money)

Sure, there’s legal back-up and their agreements were structured like that, and such a deal was legal.

But get this: When you make such agreements that effectively turn a 600 crore acquisition, where money was paid out, to ZERO in the hands of employees [at the time of acquisition], you just turn everyone in the industry off ESOPs. How do startups get smart people to work for them if they can’t offer “market linked salaries”? If someone comes and tells you his fantastic story, and how you can make money off the eventual stake you will own, would you trust him to create a fair agreement?

In this case, it might have been VC-led – or a malicious move by the founders. It was NOT accidental. The spirit of the agreement was for everyone to make money when “Redbus” was acquired; and that spirit was violated.

On the other hand, my story is that I made a reasonable amount of money in ESOPs which accelerated on an acquisition in 2007. It helped me chase my dreams – of algorithmic trading, market analysis and investments – for seven years. I have no complaints, even if perhaps, I had stayed longer, I would have made more. However, I did see some money, and my boss made absolutely sure that I did. It made be realize the value of ESOPs and the value of keeping your word in spirit – because there were a 100 ways he could have told me to sod off, and offered ESOPs of the acquirer instead. He didn’t. And I will forever be grateful.

Redbus has taken us the other way.

I hope there aren’t more like them. [in terms of the ESOP disaster]

Note: I want it to be on record that I like this deal a lot for a lot of other reasons. It was the biggest ever (and don’t give me crap about valuations or I’ll shove a Reliance Power in front of you), it made the startup ecosystem aware that they can do this, introduced the economy of scale, and it created hope. Part of this hope has been shattered because some of the top execs either didn’t get a good deal, or they were chained before they could realize gains. 

My advice: If you ever have an ESOP never accept a “conditional” acceleration, or an acceleration clause that allows for alternatives. Any exit should mean a full acceleration of all your ESOPs, regardless of whether the acquiring company offers you their ESOPs. Do not accept the phrase “substitution or acceleration” of ESOPs, since substitution means I can replace your ESOPs from company X with those of the acquiring company. 


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