BusinessStartupOctober 7, 2021by startuplogin0Small or big, your startup can deliver IPO like returns

India is gearing up for a tech IPO boom. Zomato’s dream listing on the exchanges marks the start of a new era for India’s tech industry. A number of startups, from Flipkart to PolicyBazaar to Nykaa, are set to come out with their IPO offerings soon. And many more are in the process of readying their plans.

The future may even be brighter a study predicts birth of hundreds of tech unicorns in India in years to come. A recent report by 256 Network and Praxis Global sees a number of unicorns tripling in India by 2025 to 150. Rising investments on the back of successful IPOs will likely be a key driver.

The scenario presents opportunities not just for founders of these startups, their employees and investors, but also for founders of smaller tech startups.

In the race to scale up operations and zoom market share, large tech startups are always on the hunt for acquisitions. The fact that unicorns outpace traditional tech companies in M&A deals says a lot about their hunger to grow through acquisitions.

Their acquisition spree opens the doors for founders of smaller tech startups to cash in on the efforts they have put. Acquisition of their startups by unicorns creates a two-way source for wealth creation — share swap and ESOPs — provided the deal happens on these terms.

Let’s take an example to understand how a share swap deal can build a fortune for the founders of the startup being acquired. Assume their startup was acquired by Zomato in 2019 at a valuation of $30 million in a share-swap deal. And according to the arrangement, the founders got $3 million worth of shares in Zomato at a time when the food delivery startup’s valuation was $3.6 billion. Considering the $12 billion valuation of Zomato now, the founder’s assets would have grown 10 folds to $30 million in just a matter of 2 years.

As evident from the above case and the listing of many other popular companies in recent times, valuations tend to multiply as companies get closer to realizing their IPO dream.

It’s true that not all acquirers’ IPO journey can be historic, but becoming a part of a fast-growing tech startup insure to deliver staggering returns at a time when the Indian tech space is flexing its wings for a takeoff.

And this is just one part of it. Founders can rake in a lot more shares by joining the acquirer as an employee. ESOPs are now a common feature in the employment contracts of key startup employees. These ESOPs can get to a substantial level by the time of IPO.

There are several success stories of employees making millions of dollars through the shares they got as part of remuneration. One such example is of Google whose listing made many of its employee millionaires, including some mid-level ones.

 

When does share swap make sense?

Share swap is a deal in which a company pays for acquisition by issuing its own shares to the shareholders of the target company. The process has its own advantages and disadvantages. One needs to weigh the option properly before agreeing to it. The deal makes sense for founders only when he/she believes that the acquirer has a bright future ahead of it.

One should also look at the company’s IPO plan because that’s the easiest way to exit the company whenever needed. If you feel that IPO is too far ahead and you might need the money much sooner than a share swap deal can be problematic.

Things to consider in ESOP deal

Vesting period: ESOPs are not the same as shares. They come with lock-in periods, which is ideally 4 years. Employees can use the ESOPs to buy shares at a discounted price only after the end of the vesting period. One may lose the ESOPs if he leaves the company before the end of the vesting period.

Taxation: Law sees ESOPs as part of an employee’s perks and taxes it accordingly. Profit made on the sale of shares is also subject to capital gains tax.

Future of the startup: As discussed above, linking your money with the future of a startup can only be profitable if you believe in the startup. Not just belief, you should also make a proper evaluation of the company’s financials before agreeing to take ESOPs in exchange for services.

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