While Silicon Valley companies like Facebook and Google have created thousands of millionaires through stock option programs, the same financial instruments are producing misery in India. Despite a surge in the number of startups, few workers have benefited from options. Many companies don’t pay out to employees because they struggle financially; just as often, founders fumble their employee stock option programs or refuse to deliver on promises of equity while workers don’t get the bonanza they expected.
“People jokingly refer to stock options as ESOP’s fables,” said Sanjay Swamy, managing partner at the Bangalore-based Prime Venture Partners, which has invested in 17 technology startups. If founders get more attuned to sharing wealth, stock options can be the ideal long-term compensation for startup workers, he said.
India is in the midst of a historic tech boom, with a fifth of its more than 5,000 startups spawned last year. There’s been an unprecedented number of mega fundraisings, including a record $2.5 billion investment in e-commerce provider Flipkart. But beyond founders, few employees have profited from the boom. Tech companies like Infosys founded decades ago rewarded employees with options, but the lack of recent successes means there may not be a new generation of wealth to fund more startups like in the Valley.
One reason is a dearth of big-money initial public offerings or buyouts that give lucrative paydays to everyone from venture backers to the rank-and-file. Another reason is that startup stock option programs are so new in the country that many are poorly designed and others fail to deliver because of technicalities or deceit. Lawsuits, like the one against TechProcess, may provide a more reliable legal framework for determining the obligations of startups. “We represent a few talented but distraught early-stage employees,” said Varsha Iyengar, a partner at Bangalore-based legal firm Arka Law who sees startup workers beginning to explore legal remedies. “Distress calls from those who’ve been scammed are on the rise.”