Investors delayed management ESOPs for 3 years, talks went on till 10 days before IPO: Yashish Dahiya

Investors delayed management ESOPs for 3 years, talks went on till 10 days before IPO: Yashish Dahiya

During the Moneycontrol Startup Conclave on July 7, Yashish Dahiya, the founder of Policybazaar, revealed that the company’s management had engaged in conversations with private investors regarding share-based payments three years prior to its initial public offering (IPO) in 2021. These discussions continued until just 10 days before the company’s public market debut.

This approach had an unintended consequence for Policybazaar, as it resulted in a hit of Rs 1,000 crore on the company’s profitability in its first year of listing. Dahiya acknowledged that this outcome left public market investors dissatisfied.

The decision to engage in talks with private investors for share-based payments over an extended period before the IPO was likely driven by the company’s desire to align its interests with key stakeholders and incentivize employees and early investors. By offering share-based payments, Policybazaar could ensure that individuals who contributed to the company’s growth and success would benefit from its eventual listing.

However, the prolonged negotiations meant that Policybazaar incurred a significant cost, impacting its profitability in the initial year following the IPO. This outcome likely disappointed public market investors, who expected the company to deliver strong financial performance upon entering the market.

While Dahiya acknowledged the challenges faced by Policybazaar, he did not provide specific details regarding the nature of the hit to profitability or the reasons behind the delays in the share-based payment negotiations.

Policybazaar, founded in 2008, is one of India’s leading online insurance marketplaces. The company offers a platform for individuals to compare and purchase various insurance policies, including health insurance, car insurance, and life insurance. With its IPO in 2021, Policybazaar aimed to leverage the public markets to raise capital and expand its operations.

In recent years, new-age companies such as Policybazaar, Paytm, Zomato, and Delhivery have faced criticism for allocating significant amounts of share-based payments, particularly in the form of employee stock options (ESOPs), to their founders and senior management just before going public. These allocations have been perceived as a burden on the profitability of these listed technology companies, becoming one of their major expenses.

Yashish Dahiya, the founder of Policybazaar, acknowledged that his company engaged in discussions with private investors about specific business objectives and the allocation of equity to the management team if those objectives were achieved, approximately three years before the initial public offering (IPO). These conversations likely aimed to align the interests of key stakeholders and incentivize the management team to drive the company’s growth and success.

While these share-based payments can be a valuable tool for retaining and motivating talent, they can also have implications for a company’s financial performance. The allocation of a substantial number of shares or stock options can impact profitability, especially in the early years after the IPO when these expenses are realized.

The criticism faced by these companies highlights concerns over the dilution of shareholder value and the impact on profitability due to the issuance of shares or stock options to founders and senior management. Critics argue that these allocations should be more judiciously managed to strike a balance between rewarding employees and delivering strong financial performance for public market investors.

It is worth noting that ESOPs have long been a common practice in the technology and startup sectors, where they serve as a means to attract and retain top talent in a competitive industry. However, the magnitude of these allocations and the timing close to the IPO have drawn attention and scrutiny in recent years.

The issue of share-based payments and ESOPs is part of a broader conversation surrounding corporate governance, transparency, and responsible allocation of equity. Striking the right balance between incentivizing employees and optimizing financial performance remains a challenge for many companies as they navigate the transition from private to public markets.

“I think the private investors could have been more prompt in implementing those changes. This transaction existed when the company was worth less than a billion dollars,” he added.

During the discussion, the founder of Policybazaar also addressed the issue of corporate governance lapses that have affected the startup ecosystem in recent times. He highlighted the shared responsibility of both founders and investors in addressing these challenges.

Yashish Dahiya expressed the view that both founders and investors cannot evade responsibility for such corporate governance issues. He emphasized the need for private investors to be more proactive in implementing necessary changes and ensuring robust governance practices within their portfolio companies. Dahiya specifically mentioned that certain transactions and agreements were in place when Policybazaar’s valuation was below a billion dollars, indicating the importance of early attention to corporate governance matters.

The statement highlights the significance of a strong governance framework in the startup ecosystem. Founders and investors play crucial roles in fostering an environment of transparency, accountability, and ethical practices. By addressing corporate governance lapses promptly and effectively, stakeholders can instill confidence in investors, regulators, and the general public.

During his remarks, the founder of Policybazaar acknowledged the corporate governance lapses that have affected the startup ecosystem in recent times. He emphasized that both founders and investors share the responsibility for these issues and cannot absolve themselves from it.

The statement underscores the need for a collective effort from all stakeholders to address and rectify corporate governance shortcomings. Founders, as the leaders of their respective companies, bear the responsibility of establishing a strong governance framework and setting the tone for ethical practices. Investors, on the other hand, play a critical role in providing guidance and oversight to ensure proper governance standards are upheld.

By acknowledging the shared responsibility, the Policybazaar founder highlights the importance of transparency, integrity, and accountability in the startup ecosystem. Addressing corporate governance lapses requires a commitment from all parties involved to uphold the highest standards of governance and foster an environment of trust and confidence.