IPO investors oppose listed unicorns’ ESOP, founder stock grants

Swedish pop-rock group The Cardigans delivered these lines in the 1996 song ‘Great Divide’. Going by the most literal sense, it’s a perspective you could perhaps apply to the post-IPO reality of some of India’s biggest unicorns.

The companies, their founders and boards, so used to taking decisions without pushback, are facing difficult questions from new shareholders. These are essentially the post-listing entrants whose expectations and interests don’t align with existing investors’. Serious wrangles may arise if the companies fail to bridge this “great divide”.

New shareholders in payments giant Paytm, food-delivery major Zomato and fashion and beauty retailer Nykaa voted against proposals related to employee stock options (ESOPs) and board seats.

The unicorns managed to push the proposals through as backers who entered the cap table much before the IPO collectively own a stake of 80-90%. Still, these instances show how differently the two camps think. The power dynamics might change after old backers, mainly funders like venture capitalists, cash out. 

The developments also underscore the flip side of tapping the public markets: rising investor activism can put startups in a precarious position, especially since founders hold a relatively little stake.

After its stock debut last year, Zomato sought approval for ESOP plans and the right to appoint board members for certain shareholders. While the resolution received an overall 90% support, the new set of institutional investors, who entered the company during the public offering and own 15%, opposed it.