Pre-IPO Payday: Founders Fill Their Plates While the Market Waits

In the high-stakes world of IPO-bound startups, one trend is becoming increasingly clear—when it comes to stock-based compensation, tech heads and founders are walking away with the lion’s share. A wave of pre-IPO equity grants has swept through India’s startup ecosystem, with companies like Swiggy, FirstCry, and PB Fintech leading the charge in rewarding their top management with massive Employee Stock Option Plans (ESOPs). The rationale is simple: incentivize performance, retain leadership, and protect founder equity before the public spotlight hits.

Key highlights from the equity surge

1. Swiggy, which is preparing for its IPO, granted a staggering 271 million dollars in ESOPs under its 2024 scheme. Of this, nearly 200 million dollars went to founder and CEO Sriharsha Majety alone.
2. Other senior executives, including co-founders and heads of innovation, growth, and HR, received multi-million dollar grants, with vesting periods ranging from one to eight years.
3. Startups are increasingly shifting from fixed salaries to performance-linked stock grants, driven by investor pressure to control dilution and align incentives with long-term growth.

Why tech heads take the cake

- Founders and CTOs often face the steepest dilution across funding rounds. To offset this, companies structure ESOPs to restore equity before listing.
- In consumer internet firms, where brand and tech leadership are critical, retaining top talent through stock options is seen as essential.
- Companies like FirstCry and PolicyBazaar have adopted time-bound MSOP structures, granting stock options two to three years before IPO to ensure founders hit target shareholding levels.

Regulatory clarity boosts confidence

- The Securities and Exchange Board of India (SEBI) recently resolved a long-standing ambiguity around ESOPs for promoters.
- Under new norms, founders can retain ESOPs granted at least one year before filing the Draft Red Herring Prospectus (DRHP), even if they are classified as promoters.
- This change aligns incentives and ensures that founders are not penalized for their evolving roles as companies transition to public ownership.

Not all founders cash in

- Interestingly, several IPO-bound firms have chosen not to issue pre-IPO grants to founders. These include Ola Electric, Nykaa, Honasa Consumer (Mamaearth), GoDigit, Zaggle, and Tracxn.
- In these cases, founders already hold substantial equity and have opted to avoid further dilution or regulatory scrutiny.

Investor sentiment and market impact

- The surge in stock grants comes amid a broader revival in IPO interest, especially for late-stage startups with clear profitability paths.
- Investors are increasingly favoring companies that demonstrate strong governance, transparent compensation structures, and founder alignment.
- ESOPs are no longer viewed as hurdles but as strategic tools to drive performance and ensure continuity post-listing.

Looking ahead

- As more startups prepare to go public, expect a continued uptick in stock-based compensation for tech leadership.
- Companies will likely adopt hybrid models—balancing fixed pay, performance bonuses, and equity—to attract and retain top talent.
- Regulatory oversight will remain tight, but with SEBI’s recent clarifications, founders and executives now have a clearer roadmap to equity participation.

Sources: Economic Times, Financial Express, Moneycontrol, Business Standard