With the Snapdeal-Flipkart merger inching forward, things are busier than ever in the Snapdeal camp. A group of 45 unnamed ex-employees of Snapdeal have filed a petition asking the company to explain the worth of their ESOPs, post-merger.
The group includes employees who worked middle management for around 3-4 years. Together, they hold around 10,000 stock options and are reportedly exploring available legal options too, in this regard.
What Are Their Concerns?
The Flipkart-Snapdeal merger is being speculated to be completed at a valuation of $1 Bn. These employees fear that the investors who hold preferential shares in the company, will benefit from the first payouts.
According to an ET report, investors will be selling their shares at a price of $387 (INR 25K) per share. On the other hand, the employees have been informally told that they may get $77.50 (INR 5000) per option. This is a steep fall from the $2.5K (INR 1.65 lakh) these options were worth, at their peak, when Snapdeal’s valuation rose to $6.5 Bn in February 2016.
“The former employees are miffed about this and have raised concerns that while investors and even founders have been able to negotiate their exits, there is no clarity and parity on payouts to them,” as the report states.
In an emailed response to Inc42, a Snapdeal spokesperson stated, “The ESOPs held by current and ex-employees will continue to be fully guided by the terms and conditions associated with the issue of the same. There will be no exception or deviation from the terms and conditions governing the issue of the ESOPs for any individual(s).”
Snapdeal had earlier announced to offer a $30 Mn (INR 193 Cr) bonanza to its staff, if the deal with Flipkart goes through. Snapdeal founders will give half of their total payout i.e. $30 Mn for the proposed scheme which would cover the current employees of the company.
The company aims to give the amount as a retention bonus to employees to help them continue for the next six months. Also, sources close to the development have revealed that Snapdeal also has plans to pay its ex-employees a one-time ‘ex-gratia’ (voluntary, morally bound) payment.
Preferential Shares VS ESOPs: The Difference
If we go by definition, preferential shares are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, the shareholders with preferred stock are entitled to be paid from company assets first.
At present, the Board, including Softbank Capital, are the major shareholder in the company. The Japan-based investor recently completed the buyback of shares of Kalaari Capital and the Snapdeal founders, leading to 47.5% shareholding in the ecommerce marketplace.
The investors’ consortium including Softbank, Nexus Ventures, Kalaari Capital, eBay, Ratan Tata, Azim Premji and others have poured in around 1.56 Bn funding in Snapdeal across 11 rounds, since the firm was incepted in 2010.
These investors were given preference shares at the time of investment, which allows them to raise the valuation of the company even if it is running in losses and earning lower revenues.
Earlier this month, Flipkart and Snapdeal signed a Letter of Intent (LoI) for the merger, further solidifying the certainty of the impending deal. In the wake of the LoI signing, Snapdeal was awaiting a final nod from the family offices of Azim Premji and Ratan Tata.
The merger is expected to take place through a share swap and SoftBank is likely to get upto two board seats in merged entity. The deal is expected to be signed in the next few weeks.
In contrast, when employees are awarded ESOPs, the signed contract usually includes a ‘liquidation preference clause.’ If we go by the legal definition, this clause implies that, “Liquidation preference is the amount that must be paid to the preferred stockholders before distributions may be made to common stockholders. The liquidation preference is payable on either a liquidation of the company, asset sale, merger, consolidation or any other reorganisation resulting in the change of control of the startup.”
Thus, in general, the ESOPs issued to employees are like regular shares/options (common shares) that one might purchase for any other company. It needs not legally bind the company to buy back those shares and pay equivalent compensation, per se the preferred share stakeholders.