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ESOPs Aren't Monopoly Money, Here's Why | Satish Mugulavalli (Hissa)
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"ESOPs aren't lottery tickets; they're a calculated risk with a potential for real wealth creation."
This seemingly simple statement from Satish Mugulavalli, Founder and Managing Partner of Hissa, encapsulates the core message of this episode: shifting the perception of ESOPs from "paper money" to a strategic tool for both companies and employees. We unpack the often-confusing world of ESOPs, going beyond the jargon to reveal the real-world mechanics and benefits.
Satish Mugulavalli is the Founder and Managing Partner of Hissa, a platform revolutionizing private market transactions in India. Hissa facilitates ESOP liquidity for employees and provides access to growth-stage private companies for investors. Satish is building a 150Cr fund with a 150 Cr greenshoe option. They have already closed 30 crores in their first round. The platform has generated over 5Cr in revenue till date.
Key Insights from the Conversation:
✅Discounts are Normal: Understand why ESOP transactions often happen at a discount to the last valuation, and why it's not necessarily a red flag.
✅Tax Implications: Learn the crucial difference between perquisite tax and long-term capital gains, and how it impacts your decision to exercise.
✅The Founder's Perspective: Discover why companies offer ESOPs in the first place, and how they view them as a strategic tool.
✅The Employee's Perspective: Get practical advice on evaluating an ESOP offer and understanding your potential upside.
✅Building the Future: Hear Satish's ambitious vision for creating a transparent and efficient private market exchange in India.
✅The right questions to ask as an employee.
Chapters:
- 0:00:00 - Introduction: Demystifying ESOPs and the Rise of Hissa
- 0:03:15 - Satish's Journey: From Startup Ecosystem to Private Markets
- 0:05:36 - Hissa's Dual Approach: SaaS Platform and Investment Fund
- 0:11:05 - Target Market: Identifying the Right Companies for ESOP Liquidity
- 0:20:30 - The Hissa Fund: Investment Strategy and Fundraising
- 0:39:23 - Understanding Valuation Discounts in Secondary ESOP Transactions
- 0:58:11 - ESOP 101: Grant, Vesting, Exercise, and Tax Implications
- 1:02:37 - The "Why Exercise?" Question: Balancing Risk and Reward
- 1:07:38 - Employee friendly ESOPs
- 1:11:51 - Building the "NSE/BSE of Private Markets": Hissa's Long-Term Vision
- 1:18:00 - Hissa's Go-To-Market Strategy: Reaching Founders and Companies
- 1:25:00- Future of ESOPs
#ESOPs #StartupIndia #PrivateMarkets #Hissa #SatishMugulavalli #FounderThesis #Equity #Compensation #Vesting #StockOptions #Startups #Investing #Finance #India #Liquidity #TaxPlanning
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Transcript
Understanding Paper Wealth and ESOFs
00:00:00
Speaker
Remains paper wealth. You know, you would have heard a lot of times saying there's so much billion worth of ESOFs, but we know all of it is paper wealth. Money chases those who need it the least.
00:00:11
Speaker
So they literally are at the mercy of the company providing some sort of money. They are really important to build the company. They are one of the key ingredients of building the company. What is the idea of ESOF? ESOF is a tool of long-term incentives. So you want people to stay and help to build the company.
00:00:29
Speaker
Have you heard of the term ESWAPS? It stands for employee stock options. Basically, it is equity in the company where you are employed. For a startup founder, it's a great way to hire expensive talent. If I want to hire somebody who's expecting a one crore salary, I may not be able to afford it as the founder of a young startup.
00:00:47
Speaker
So I would do something like offer him 50 lakhs as cash salary and 50 lakhs as equity stock options. Basically, He has
Impact of ESOFs on the Indian Startup Ecosystem
00:00:57
Speaker
skin in the game. If my startup becomes like a rocket ship and the valuation becomes 10x, 50x, whatever, the equity he holds will also get that kind of appreciation and he may end up being a millionaire just because of that equity he had.
00:01:11
Speaker
You might have heard of the Flipkart mafia. These are people who made so much money when Flipkart was bought out by Walmart. ah They made money from the e-sops that they held, and that allowed them to go on and start new businesses or fund other startups. That was a massive unlock in the Indian startup ecosystem.
Hissa's Role in Managing ESOPs and Liquidity
00:01:28
Speaker
In this episode of the Founder Thesis podcast, I'm speaking to Satish Mughalawali. He's the founder of Hissa, and Hissa helps... two stakeholders in this ESOP equation. It helps founders to manage the cap tables and it helps employees to get cash out of the ESOPs that they have. Typically ESOPs might give you cash after anywhere from five years to 10 years, whereas an employee might need cash before that. So Hissa is making that happen through a fund which is buying ESOPs of employees.
00:02:00
Speaker
This is a fascinating conversation to help you learn about the power of ESOPs if used correctly. I'm your host, Akshay Dutt, and this is the Founder Thesis Podcast.
00:02:18
Speaker
So, Satish, what is Hissa? Hissa, the name is derived from the Hindi word or most, you know, the in most Indian languages, Hissa means share.
00:02:31
Speaker
So since we are in the business of dealing with ches we decided to keep this name Hissa. What it means for us is a platform where you could transactions in a really quick tech driven way between companies, their shareholders and investors.
00:02:55
Speaker
The part of the problem that we are trying to solve is to make sure we bring liquidity in private markets.
Liquidity in Private Markets
00:03:05
Speaker
um So what is the liquidity in private markets traditionally means VCs, right?
00:03:16
Speaker
Like VCs buying stakes from angel investors and then PEs buying stakes from VCs. And yeah again, vcs but like VCs are typically the ones who give liquidity in private market and VCs further get liquidity from PE funds. Am I right in my understanding?
00:03:34
Speaker
Well, I mean, it's it's it's one of the use cases, is what you mentioned. It's a lot more broader than that. you know Typically, private companies eventually get liquidity when they get acquired or merged with another listed company or you know or they go list themselves.
00:03:52
Speaker
Now this is the eventual um liquidity. they Now there are several things that happen in between and one of is the example that you gave where one investor may come and buy out another investor and so on and so forth.
00:04:05
Speaker
But there are several forms. There are several forms of liquidity. The ultimate liquidity as we call it is listing. The intermediate liquidities are and one investor, one shareholder buying from the other.
00:04:17
Speaker
Okay. And you are focused specifically on ah the ESOP pool.
Importance of Employee Liquidity
00:04:24
Speaker
That is correct. Why is that? So if you look at ah private companies and when I say private companies, i largely mean in the context of venture funded private businesses.
00:04:37
Speaker
If you look at traditionally how startups as we call them have been built largely based on an idea execute up to some point the business keeps running you get to profitability then you list.
00:04:54
Speaker
Now if you're a tech driven company then maybe you're doing something that's really valuable for a larger business and they come and acquire you. So typically, the timeframe for this has been five to six years.
00:05:08
Speaker
you know If you go back to the late 90s or the the first wave of the venture world where India participated or or Indians participated, so to speak. So since then to now, I think lot of large investors have stepped into the private markets.
00:05:27
Speaker
Large amounts of capital has flown into these private businesses. and because of that, i companies can stay private longer.
00:05:38
Speaker
know, one of the reasons that you would go to list is for liquidity. or to grow the company, get new capital and grow the company. Now if that capital is available through private markets, ah you can stay private longer.
00:05:53
Speaker
So compared to what's going on in the last five, six years or even 10 years to 30 years, there's been a drastic change. Companies are staying private longer.
00:06:03
Speaker
So when private, when companies stay private longer, ah one of the most important thing that comes up is um what are the different inrid you know parts of these private companies and how do they look at liquidity?
Challenges and Solutions for ESOP Holders
00:06:21
Speaker
So if you look at founders or promoters, as we call it in the Indian parlance, usually you get liquidity when you take the company public. um Venture investors, angel investors, like you mentioned earlier, could probably sell part of or all their stake to a larger fund coming in.
00:06:41
Speaker
But one area that completely gets ignored is employees. You know, what happens to these employees? So employees typically are not investors as in they don't have the rights of the investors.
00:06:54
Speaker
So they literally are um at the mercy of the company to provide them some sort of liquidity. But they are really important to build the company. They are one the key ingredients of building the company.
00:07:07
Speaker
And given that the companies are staying private longer, it also means that an employee is spending a lot more time in the company. And if you don't liquidate their options, it remains paper wealth.
00:07:24
Speaker
and know, you would have heard a lot of times saying there's so much billion worth of visa ops, but we know all of it is paper wealth, right? So we kind of saw that this was a segment of stakeholders and that was probably not being attended to enough and we found an opportunity there and said, let's go build a fund that let us, you know, these needs.
00:07:44
Speaker
What is the ah the business use case for this fund? like Like you would have pitched to LPs, limited partners who put money into funds. What was the pitch to the LPs?
00:07:57
Speaker
Why will this be a good investment? So the the target LPs that we have are largely individual investors, ah people who are in the startup ecosystem, family offices who are mostly going through a generational wealth change. right So if you look at the typical investors in a venture funded company,
00:08:22
Speaker
ah You see the very early stage angel investors, and our small checks, super high risk and the good angel investors, the ones who have financially had a good outcome are the ones who make a lot of investments.
00:08:34
Speaker
hey And then as you progress the value chain, you will begin to see institutional investors you know come in. And hits a peak at the time of um listing or pre-listing as we call it once the Once you know that the company is about to list, then you will see a lot more traditional you know investors, family offices coming into the fold.
00:09:01
Speaker
Now, lot of family offices, some of them, and this is not true, just in India worldwide, right, who've been running traditional businesses, ah may have made investments in venture capital funds or may have made investments in companies directly.
00:09:16
Speaker
but they've largely built their business, ah traditional businesses. you know Now you have the next generation of these families coming in and they now want to participate in the startup world. right So if you look at our target focus of investors, they are either in the very early stage angel investing um or they get in at the pre-IPO state which is largely a wealth play. You know, you will like you'll have a wealth manager who's managing their wealth and say, hey, here's a good company that's going to go IPO and maybe you should look at it and and so on and so forth.
00:09:54
Speaker
So there's an entire spectrum in between where unless you are in the startup world, you don't get access.
Investor Strategy and Market Readiness
00:10:00
Speaker
So our pitch is to those investors saying, you know, we are getting in at a slightly more mature stage of a company because the fund thesis is that we invest in growth stage company. We basically buy ESOPs of growth stage companies.
00:10:15
Speaker
So thereby it's not as super risky as angel investing. um And then ah we look at exiting closer to the IPO um and this exit is also interesting because then family officers sometimes who may want to come in with a smaller check at this stage and a larger check at the later stage.
00:10:37
Speaker
So, works for us both from an entry and an exit perspective. So, those investors who fit into this are better suited investors for a product like ours.
00:10:49
Speaker
so For example, if I wanted to invest in SpaceX, um I would never be able to do that because I probably would invest maybe whatever, let's say $100,000 is what I can invest as an angel investor. So I will never get access to investing in SpaceX because I'm too small for them.
00:11:11
Speaker
Absolutely. but Through the ESOP pool, so SpaceX employees who hold ESOPs and SpaceX, ah through that route, I can get ownership of SpaceX, which I feel is like a hot startup, a long-term bet, will undoubtedly grow, whatever conviction i have built on it.
00:11:29
Speaker
ah So the only way to access those kind of companies is through this kind of a vehicle. ah so So that's the vision that you're building for. Exactly. those Those kind of companies with the size of checks that you would want to do.
00:11:43
Speaker
Right, right, right. Yeah. Because ah with a small tech I cannot participate in any other way. check Exactly. I'm too small for them because they're they've grown beyond that a certain level.
00:11:56
Speaker
Okay. and Understood. and Understood. Interesting. ah There is, in fact... ah I remember reading about some ETF which got listed in the US with the SpaceX example. I'm quoting specifically with respect to that ETF. i don't know if you read about that. like They did something similar like buying ESOPs and then putting it on the stock exchange so that investors can buy into that. and it's rat It's trading at multiples of the net asset value. and
00:12:28
Speaker
Okay. I see the... ah Yeah, mean that that there are multiple structures that you can put together, but I think it's it's too complex and sophisticated you know for the Indian market as of now to be able to do so many of these structural stuff. I mean, SpaceX, OpenAI, and the companies that have all like been seriously broken out.
00:12:49
Speaker
you know and there's no dearth of capital and so on. There are possibly structures around that. um I don't think India is is ready for too much of that kind of structural stuff. We have a good AF structure that the SEBI has given and I think we can stay within that and be able to build the product.
00:13:13
Speaker
and we would want ah What is the qualification for someone to be an investor with Hissa for you to take him as an LP? What do you look at minimum investment size?
00:13:24
Speaker
Oh, that's all, you know, very regulated. We are CAD2 SEBI fund, which is one crore is the minimum investment from an LP. And obviously, the you know, it's more process in terms of are you a domestic investor, international investor, what process you follow.
00:13:41
Speaker
And then some rules around how do you manage your portfolio, what exposures you need to have, you know, what can you do inside India, what can you do outside India and so on and so forth. But as far as the investors are concerned, one crore is the minimum ticket size.
00:13:54
Speaker
There's a very well defined KYC and compliance process. um and And some of them who've been familiar with the system in India actually find it quite easy to, you know, to manage this.
00:14:08
Speaker
And ah you are looking, you are happy with the one crore minimum ticket size? What do you want as your benchmark? No, that's a great question. You know, one crore obviously is ah probably the right number for a certain type of investor.
00:14:22
Speaker
So if we look at the way any of the fund gets structured, usually you break it down depending on the type of investor that you're looking at, right?
00:14:34
Speaker
So a lot of people in the startup ecosystem would want to do 1 crore to 5 crore checks. you know Nothing beyond that. right And this I'm talking about individual.
00:14:45
Speaker
you know Fairly wealthy individual, second time, third time founders. they you know They've made their money through previous startups, understands the product and and so on and so forth.
00:14:56
Speaker
ah Then there are the family offices who go anywhere between 5 crores to 15 crores. We would want a healthy balance of the two. um At this fund type, at this point in time, in terms of institutional investors or funder funds wanting to invest, that pool is slightly smaller. I think and it will expand as we go along.
00:15:20
Speaker
So those funds, we have to go with what their fund thesis is in terms of how much they would want to put in primary versus second, especially i when I'm talking about fund of funds, right?
00:15:32
Speaker
So we don't have any specific rules in terms of I would not take so much money, you know, and so on. There's no max. as such, but in terms of where we believe the first fund of this type and the kind of LPs that would add value, would appreciate the product, so to speak, I think will be a combination of 1 to 5 crore investors. There will be a bunch of them and there will be these family offices which are between 5 and 15 crores.
00:15:59
Speaker
Okay. How much have you raised so far for the Hissa fund? You're currently on fund 1. Yeah, this is our fund one. It's a 150 crore fund with a green shoe 150. We've just done our first close. We've closed for 30 crores and there's another, you know, 100 crores in pipeline, you know, for us to close this year.
00:16:20
Speaker
What does this mean? Green shoe of 150 crores? So, green shoe essentially means that ah you don't have to go through an entire approval process, you know, if you want to raise more than that.
00:16:32
Speaker
right So we want to make sure that the product gets to a point where you know we have enough momentum, so we don't have to go back to SEBI and say, hey, I need an approval for an additional thing.
00:16:45
Speaker
I mean, all of this is process. Process means time and regulations means time and so on. right ah So we've taken a green show of 150. So up to 300 crores, we don't need to go back for any restructuring of the, know it's more of a regulatory concept.
Hissa's Investment Strategy and Platform
00:17:00
Speaker
And what what has been the average ticket size, like a amount invested per investor? Since we are in the early stage, the early backers are largely from the founder and, you know, from that community. One to five. ofka Yeah. So it's in it's in that one to five range.
00:17:17
Speaker
Okay. So I think once we have the family offices stepping in, then you're going to see the average, you know, move little bit. How would you... Convince a family office to put in money.
00:17:30
Speaker
What's the... ah Do you think they will come in only after you have shown returns and built a track record or can you sell the idea, the dream? Well, I think, you know, obviously there are investors of all types, right? and And what is important for us is to understand the investor mindset of how they are doing asset allocations.
00:17:52
Speaker
You know, normally any fund, which is either um fund managers are new or the product is new. ah Typically, you put it under a category called emerging funds or emerging fund managers, right? Depending on, you how you see it.
00:18:08
Speaker
So, ah people try to figure out what a family office exposure looks like. Like how much do you have in public markets, how much do you have in real estate and how much do you have already in private markets either directly or through some sort of you know indirect investments.
00:18:24
Speaker
So we fall in that you know one bucket of their entire wealth management. Now if they are overexposed to AIFs already, you know Now they would look at a fund like this very differently, saying, you know am I buying into the same assets that I have in another AIF or is this a different thesis?
00:18:44
Speaker
So the first step for us is to kind of understand what their exposure is. and And in cases where there's a very clear transition happening from the previous generation to the next generation, we look at what their exposure is to early stage startups.
00:19:00
Speaker
you know And depending on that, ah you know we build the pitch. and know Essentially, it's working with the family to kind of understand what their exposure to different types of asset is.
00:19:12
Speaker
And then we make a recommendation saying, okay, here's what I think we should do. And here's how it fits into your you know overall ah you know scheme of things. you know that's basic fundamentals of any how any wealth manager would look at your wealth, right?
00:19:25
Speaker
Second, um the product itself and since the product is a very specific asset into ESOPs and maybe some early angels if i can if I can look at, people tend to look at this and saying, hey um I missed the bus here.
00:19:47
Speaker
Because I missed angel in investing here. Now, can i get in here now? I do want to give a ah you know larger check as a family office directly directly to the fund, but I don't think the company is ready.
00:20:00
Speaker
right I will do it at a later point in time. So they look at this as getting access to a vehicle like this saying I will do a small check right now. And then since there is a relationship with the fund and the fund has a relationship with the company, then you have a bigger possibility of doing in a larger check, you know, slightly down the road.
00:20:20
Speaker
so So depending on what the mindset is, what the family's exposure to private markets is, and here's how we would you would pitch. i mean, i it's it's kind of pretty nuanced, but ideally from wealth perspective, one of the biggest lessons that I have learned is, you know, each individual is different, each family is different, needs are different, you know, their own liquidity needs are different.
00:20:44
Speaker
So if you don't understand and you just throw your standard picture at everybody, then chances are, ah pretty average for it to stick.
00:20:55
Speaker
Okay. How big is the family office market in India? How many family offices are there who would have a, like that kind of a ticket size, which you look at like a 5 crore, 215, 20 crore, the ability to put in that kind of check size?
00:21:10
Speaker
What's the number? You will be so you will be surprised. You will be surprised. i think what we know is there are anywhere between, you know, I mean, you pick, you your report, right? Anywhere between 600 to 2000 family, single family offices, which have a significant amount of wealth.
00:21:28
Speaker
And when I say significant amount of wealth, I'm really talking, you know, upwards of 2000 crores, you know, type of wealth spread across all the different instruments, right?
00:21:40
Speaker
Now, the key here is to identify what their view of is of the startups and and so on. right yeah So there there are family offices that we have spoken to and I have personally spoken to over the last 10 plus years in my you know other roles where they want nothing to do with private markets and so on. And moment there is a next generation coming in, you know they completely go the other way.
00:22:13
Speaker
i hey we We don't want anything to with real estate, we want everything to do with private markets and and and so on. So, it's a very hard to nail down a particular number. All I can tell you is um you will be surprised every corner of the country and it's nothing to do with the metros. You know you have very, very oh you know, small towns who have kind of built up these entrepreneurs last, you know, over the last 30, 40 years, um they have generated, they have built a lot of, they've built a very big empire.
00:22:51
Speaker
They are looking to figure out what do they do for the next generation? What did they do with wealth distribution and so on? So the interest in wanting to understand this is at a peak.
00:23:04
Speaker
and so So, we've got to break that down, get in, figure out you know the nuances of each office, each investor and and and figure out the pitch from there.
00:23:16
Speaker
And how do you reach them? Is it like any other sales? Yeah, it's it's it's absolute sales job. I mean, you know, any venture investing is a sales job on both sides.
00:23:28
Speaker
You know, you sell to the company to take your money, you sell to the investor to take their money. So it's, you know, you put it 100% accurately. It is a sales job. you know because Obviously, there's all investing and other things at the bottom, but fundamentally, you're asking for somebody's wealth and you're telling somebody to take my money.
00:23:49
Speaker
So it's a complete sales job, you know, and more so in a product like ours, right? um Essentially, you are trying to productize capital in a way it's kind of useful, it's helpful to the the ecosystem and so on. So you need to convince founders that giving periodic liquidity to employees is good.
00:24:11
Speaker
I mean, that itself is a sales pitch, right? Whether you take my money or not, you know, doing that function is good for the ecosystem. You know, that's a sales pitch. So almost every function that you see, you know, you know in this world ah is a sales pitch.
00:24:27
Speaker
Okay. Okay. Okay. Interesting. um and Let's talk about the, so one part is sourcing money, which we've gone into. You've given me some ah size estimates of that market also.
00:24:41
Speaker
ah Now sourcing e equity, like at the end of the day, you're sourcing money to buy equity. ah So ah how do you do that? How do you source the equity? So,
00:24:52
Speaker
and And that's where, you know, little bit of the different approach that we have taken, um you know, from a fund, right? Because I don't i don't see us as a ah capital provider alone.
00:25:06
Speaker
um What we want to look at, the vision for ourselves is to be a private market transaction engine. Now, when we have to do that, you know, and this is where tech comes in, right?
00:25:18
Speaker
So we want to make sure that your equity is managed in a company appropriately. Because what you cannot do, I mean, the way I'm sure you know how the venture world operates right now, if you want to make a primary issuance, an investor will come in, there deep due diligence on the business.
00:25:37
Speaker
um And there is documentation that goes on and that just the documentation in terms of shareholder agreements, and can take several weeks, negotiations around that. And it's usually 45 to 90 day process you know to close around.
00:25:52
Speaker
And in some case in many cases, it takes a lot longer. So the objective for us is for the kind of product that we are doing, we want to make sure that from the day an employee says tells their company that, hey, i would want to take this liquidity that you're offering,
00:26:11
Speaker
we want to be able to give them a check in five days. So what we call a T plus five settlement. right So this requires a whole bunch of activities that needs to get done and that cannot happen without tech.
00:26:22
Speaker
If you put that on manual mode, and it will take forever. right so the the idea for us is to complete this as quickly as possible. So we built a tech platform that the companies can use to first digitize their equity.
00:26:35
Speaker
So once everything is digitized, um it becomes a lot more easier for us to do transactions on top of it without having to do custom delusions every time. right So one part of the sourcing comes from the fact that people want to adopt these software products and that's one of our deal sourcing engines. right ah The second deal sourcing and engine is lot more conventional which is ah just like a VC fund.
00:27:03
Speaker
We track the companies that fall into our catchment area. We make outbound calls, talk to the founders, explain the concept, work with them before they get to liquidity readiness.
00:27:14
Speaker
Because many times, unlike venture funds where um companies begin to raise money, you know, a little before they run out of money or when they need some growth capital, right?
00:27:28
Speaker
Here we see um that we need to start even more earlier. Essentially, getting the concept, getting the promoters to understand how it will help them rationalize their compensation cost.
00:27:41
Speaker
you know Because many times it happens that you know I want this key team or a bunch of people are sitting in large companies, they are sitting on extremely high salaries. You can't pay them high salaries and you give them options some part of the options instead of salaries.
00:27:58
Speaker
Now, when you are giving somebody options instead of cash, if you do not have a liquidity you know i won't say a liquidity program but a liquidity thought associated with it it will turn out to be paper wealth and you will have to depend on good times like 2021 where there was excess capital available that you could use to you know provide this liquidity so this whole concept of trying to work with the founders get them to understand that hey think about providing for your employees next year and here's how you can do it.
00:28:29
Speaker
Start by digitizing everything, then start looking at how do you trade off cash with um options, you know, do it scientifically rather than doing it at all. So we've built a complete platform for this that will help them do this.
00:28:42
Speaker
um so The sales process is partly done by this product side and partly done using the usual mechanism that a venture fund.
00:28:52
Speaker
would see One small nuance I would like to add here and in terms of, i mean you've spoken to so many venture capitalists so and I'm sure you're kind of already aware of it, but what happens in as the company begins to grow,
00:29:06
Speaker
um And Karthik Reddy of Bloom says this really well, right? you know the The manager doesn't pick the asset, the asset picks the manager.
00:29:19
Speaker
So it's it's kind of really important that you've got to be in a place where ah founder who is our founder,
00:29:31
Speaker
one side of the customer wants to do this and wants to approach you you know for getting liquidity into their employees.
00:29:43
Speaker
So, mix of traditional and tech, I think one day it will get a lot more tech as these products become sophisticated but the human touch in private markets will never go away.
00:29:57
Speaker
You know, it's essentially you're selling to the founder who in turn has to sell to their employees or offer this program to their employees.
00:30:08
Speaker
So long story short, half tech, half traditional way of getting to the companies. Okay, interesting. I'm going to dive deep on a bunch of stuff you said.
00:30:20
Speaker
First, ah help me understand who's the target profile of companies, startups, what stage, how much funding, what valuation?
00:30:30
Speaker
Do you have any such benchmarks? and Absolutely. so So, see when we look at a financial product, right you need need to have financial discipline around that in the product. Ultimately, our goal is to provide ease of liquidity, but then you start looking at whom do I provide ease of liquidity to, because ease of liquidity itself and is should not be done for all types of companies.
00:30:56
Speaker
You know, whether they use our capital or somebody else's capital, it doesn't matter. Because what is the idea of ESOP? ESOP is a tool of, um you know, long-term incentive. So you want people to stay, help build the company.
00:31:08
Speaker
We are only here talking about periodic liquidity at points in time where the company has reached a certain stage. So let's say I'll give you an example. If I give a bunch of people ESOP today and say this ESOP was best over a period of four years, there's no point in me doing liquidity next year.
00:31:28
Speaker
you know so So, we consider a whole bunch of things. one What we consider is what is called ESOP aging. So, ESOP aging is essentially we're trying to figure out how long the employee has been in the company and how much of the ESOPs have been vested and can we do a small percentage of that vested ESOPs.
00:31:45
Speaker
ah which essentially means that you know at least the employees should have held ESOPs for about three years plus. and That also shows that they're committed into the company you know and they want to grow with the company going forward.
00:31:58
Speaker
um The companies have to be in their early growth stage because you are not providing is sub liquidity for companies that have raised seed rocks because the companies
Investment Criteria and ESOP Valuation
00:32:09
Speaker
themselves have not grown.
00:32:10
Speaker
you know So how can you provide return when the companies themselves have not grown. right So we look at early growth, what we call early growth, which is series B and later.
00:32:22
Speaker
um And there are certain other things we look at in terms of has the company in a stage where they have raised enough capital because one of the key things for liquidity is that there needs to be some sort of vibrancy in raising capital.
00:32:39
Speaker
know And by that, I don't mean that you need to be raising capital every six months. But you know I know that okay for a company go to go from A to B, i maybe I need 15 to 20 million dollars. From to C, I need maybe 25 to 40 million dollars.
00:32:54
Speaker
And I have product and revenue growth that can attract that kind of capital. So we look for companies which are still raising capital and continuing to raise and they have that momentum.
00:33:09
Speaker
um In terms of valuation, it's Again, a financial discipline to make sure you know we have the right entry point. So, largely we look at companies which are $300 million dollars and below.
00:33:23
Speaker
Anything above that, um i think it's already got too expensive for us for the thesis that we have built in this fund. So, a good range to look at would be anywhere between $100 to $300 million in valuation.
00:33:38
Speaker
Okay. What is the... And there are certain other smaller nuances. For example, you have raised... If you have raised venture debt, it's a positive. Because when somebody looks at... They have done a due diligence.
00:33:50
Speaker
Their due diligence is several times different than equity-led due diligence, right? Because they want to make sure that capital comes back and and so on and so forth. You know, so all of these things are a little positive to kind of figure out, okay, they're on the growth track, tragic.
00:34:05
Speaker
Okay. Right, right, right. You know, I always feel the the funny thing about the whole venture industry is that money chases those who need it the least. Yeah. but is true that that that that is why i said you know the karthik's word about the asset picking the manager yes you know you you want to be in a position where companies come and say hey i want your money now yes yes yes so true so true yeah okay um this 100 to 300 million valuation uh range has how many companies in it how big is that universe
00:34:43
Speaker
So um if you look at again, that's a very floating number at any point in time, and know give given India's landscape today. So you are probably looking at anywhere in the 200 to 300 number of companies.
00:34:59
Speaker
So fairly small. And I am guessing this would be a sweet spot for a lot of India based funds. because It depends, it depends ah because there's still India is still, you know in in terms of the number of fund houses and fund managers, ah we are a lot more at the early stage, which is seed. voc you know so So that's like 10 million to 50 million valuation. Correct, correct. So that's where the big bulge is. okay
00:35:30
Speaker
the big you know Where the number of investors are? Obviously capital counts and so on. you know If you were to look at a ah typical growth fund, you know if your check is going to $25 million, dollars right if that's your sweet spot,
00:35:46
Speaker
you know then you're really looking at 300 million dollar plus 10 plus million dollars ah ten percent glass of plus of ownership and and so on and so forth right so that's why i said it's 100 to 300 so typically if you look at series b early growth the company is still not broken out ah there is still a risk that we as a fund take it's nowhere close to saying hey this company has grown you know i know i will get my PE type returns back. We are still not in that stage yet. right So that's the you know that's the sweet spot.
00:36:20
Speaker
um I'm sure there will be a little here, little there. and as um as the years go on, because venture capital, you know every year it's either a big uptick and then things settle down for a few years and then there will be another big uptick and so on. right So if I were to put the same logic for 21 companies, you know maybe we'll have to move the slider here there.
00:36:50
Speaker
you know hidden hidden there and know okay Essentially, the the math and and the important math is the entry point to exit point type of ratio. And that's where I think is the sweet spot for companies who are ready for ESOP liquidity.
00:37:04
Speaker
They may still have secondary assets that are good enough. right But from an ESOP liquidity perspective, given that the overarching theme is to make sure that employees stay, you generate lot more wealth if they continue to stay.
00:37:17
Speaker
for a periodic case of liquidity perspective, I think this is is what we believe is the sweet spot. so Okay. Okay. Understood.
00:37:25
Speaker
How do you decide the valuation at which you buy shares? Is it on the last raise? or Because companies might dispute that and say, no, we've grown since then and this should be our valuation today. and Absolutely. I think, you know, valuation is a topic that can be debated for hours.
00:37:47
Speaker
Largely for us, the last round is the anchor from a valuation perspective. Now, is there a discount? Is there a premium? All depends on company to company.
00:37:59
Speaker
you know But and since we are not going to be valuing the company independently, the last round valuation progress, I mean, whole lot of numbers go into it.
00:38:12
Speaker
ah Largely, if you look at secondaries as an asset class, ah usually and depending on what timing, what situation you are in, the discounts range from 10 to 40. You know, uh, now, and you're saying there is always a discount from the last round or they could, just listen this discount is a norm, you know, some, kind some companies may come on the premium.
00:38:36
Speaker
Right. okay So, so it kind of really depends, but when you just generally ask around and say, Hey, what is the secondary price? Uh, it is at a discount to the last primary. Okay.
00:38:48
Speaker
And in our case, since we are buying ESOPS, which are largely equity shares, don't carry ah liquidation preference and and so on and so forth. Generally, it is priced a little lower because the security itself is at the bottom of the stack.
00:39:01
Speaker
you know All equity is same, right? All equity is same, but investors may have preference shares, which comes with additional rights in in in in the situation of liquidation. right but if if everything is happy and so on everything gets converted to equity and then all equity is the same anyway Ah, okay. okay yeah I think i think you know the the liquidation preference is ah is again hotly debated topic.
00:39:32
Speaker
We don't believe it's required for a product of this type because the ultimately it's it's ESOP liquidity or even early angel liquidity who may still be holding just plain equity shares.
00:39:47
Speaker
And I i think when LP kicks in, ultimately the company has not performed well enough.
00:39:59
Speaker
You know, that is why you're using LP and LP is a mechanism for... Here LP is liquidation preference. Yeah, preference. Just to avoid confusion from the other LP. Exactly.
00:40:11
Speaker
So, it' you know, and it's it's more to do when the outcomes are very average. yeah You might have heard of... um you know companies where they raised $100 million dollars in capital and they got sold for $90 or $110 and nobody made any money.
00:40:27
Speaker
So effectively, the investors who put in money take their amount back and there's nothing else left to be you know distributed. So that's only that's the situation where an LP is useful.
00:40:42
Speaker
But for a product of this kind, um I think LP is not really relevant. I'm sure this is a controversial topic. People will say they need some sort of downside protection.
00:40:57
Speaker
But I personally believe this is private markets. You are entering in reasonably early even with the thesis that we have.
00:41:07
Speaker
you really need to look for your you know big wins because ultimately from a fund return perspective, the ones that you get from LPs will really not make a difference.
00:41:20
Speaker
Of course, they will add up, but they won't really move the needle. The discount, which you said is the norm, doesn't that send a negative signal to the employee?
00:41:34
Speaker
you want the employee to believe in the future and yet you are buying him out at a discount from the last valuation, which is probably a public number. No, that's a great question. In fact, you know, that is why i think the discount has to be something that is appropriate to the kind of security that you're buying.
00:41:57
Speaker
Okay. I don't think you should, I personally don't believe you should shortchange the employees. you know and and And I'll tell you where things get a little complicated, right? So let's assume 2021 you raised the round.
00:42:14
Speaker
And because there was so much capital, you got a valuation that quote unquote did not match the typical numbers.
00:42:24
Speaker
you know If I'm saying I'm getting a... You were overvalued because of the bubble. You are overvalued. Now, a year later, you are doing liquidity and maybe even some secondary is going on in the company.
00:42:39
Speaker
The new buyer is going to say, hey, I understand you got money at that valuation, but you are valued back then. you know, you're sorry, you're overvalued back then.
00:42:50
Speaker
So if I want to ask for 40% discount today on that, maybe it is 15% discount in reality to what you should have been valued.
00:43:02
Speaker
So, and this is where it kind of gets complicated, right? And underlying theme is that we don't want to shortchange the employees. you know That is why sometimes when secondaries happen, whenever employees ask and say, hey, the last round was 300 million, why am I selling at 250?
00:43:22
Speaker
So then you point out to another professional investor you know selling at 250 and say, there is no difference in an investor price and your price. and And this is very important for the companies to do as well.
00:43:36
Speaker
Even though as much as an investor as or as a buyer, I would want to go in you know, as low as possible, but it's never a smart thing to go and say, and again, it also tells you something about, you know, why is the company, you know, going such a deep discount, right?
00:43:55
Speaker
You know, I would, I would treat this very, very carefully. You know, I think 10 to 15% is a market discount, is is sharper than a market discount, or what I meant to say is lesser than a market discount.
00:44:08
Speaker
um But anything more than that, I think you have to have a very strong reason you are doing it. Either you are tremendously overvalued or you've sold part of the business, so a new valuation is getting done and so on and so forth.
00:44:22
Speaker
ah But you would never want to encourage shortchanging an employee.
00:44:29
Speaker
So it seems like the valuation number is a game that everyone is in on when you're saying that it is standard practice to discount the valuation. So when it comes to actual cash, ah like you know putting your money where your mouth is, there's always a discount to that.
00:44:48
Speaker
on paper valuation number? like Like, is this something which the whole ecosystem is actively gaming? Like, you know, in terms of artificially showing a higher number, which and the truth comes out when you're doing secondaries, because then you're actually paying money for those shares and you don't want to overpay them.
00:45:10
Speaker
Well, I think that, you know, it's a lot more nuanced than that, right? See, for example, anytime you do primary capital, what is the use of the primary capital? Now, the primary capital is used to build the business, grow the company, right?
00:45:22
Speaker
Now, when you do a secondary, you know, capital, the money is not coming into the company. and So i would I would want to see that distinction first. right It is moving between shareholder A and shareholder B. Typically, you know and I think the origins of the discount actually started there.
00:45:41
Speaker
That this capital is not to help grow the company. you know It is for somebody to take value off the table. Right. so It's somebody's need and so they're willing to accept a discount. like Like it's more about timing that I need the money now so I will take a discount.
00:45:58
Speaker
Exactly. i mean, there is that part of it as well. right a seller you know um obviously has some needs and is willing to go lower than what a primary investor you know would have done.
00:46:12
Speaker
and so and And all of these things happen in investing, right? I don't think I would i would not use a strong word as gaming. I think the fact that people came in early, they have some needs and they need to get out and a new buyer is coming in and saying, hey, ah this is this capital that is not going to grow the company.
00:46:34
Speaker
My capital as a primary capital provider is not going to go into the company is going to go an existing shareholder I can use that to maybe offset my ownership a little bit if there is a small price difference and and because of that the entire system says you know I am okay with this this kind of discount. You are providing liquidity and therefore it is reasonable to ask for a discount.
00:47:02
Speaker
Exactly, because the private markets factor in, um you know, illiquidity into it anyway, right? So, now that the liquidity is coming out, you see that small change in price, you know, reflecting that.
00:47:15
Speaker
I think that is so fair. anything Anything up to 20%, I think is fair game for everyday everybody. Beyond that, like I said, maybe it's a case of overvaluation, maybe it's a case of somebody really wanting to get out and nobody being able to help them, you know,
00:47:31
Speaker
Or even a prowling shark who wants to come in and say, you know, let me do something. Now it is up to you to figure out in what kind of assets you want to participate. Okay, okay, okay.
00:47:44
Speaker
and just Understood. Interesting. ah I think this market of secondaries is not as developed in India as it
Indian Secondary Market Developments
00:47:50
Speaker
is in the West, right? I think in the West, there are dedicated secondaries funds, like we just do this, like buyout primary investors at a discount, and which I don't think India has any such funds so far.
00:48:03
Speaker
India has just started, you know we've had two secondary funds, one from one of the ex-partners of Peak15. I think it's called,
00:48:16
Speaker
the I missed i miss the name you know and then there is one more fund that's been set up ah called Oyster, i think it's Oyster.
00:48:29
Speaker
specific India, Asia-Pacific and in that more India-specific secondary funds.
00:48:36
Speaker
I think it's a start. know, ours is again falls into the same bucket as a secondary fund but focused on a slightly different kind of asset class.
00:48:47
Speaker
Kenro, Kenro Capital. I got that name. Kenro Capital. Okay. yeah Okay. okay This whole business seems like a pretty good opportunity for a fund manager to look at, right? The secondaries market. You're getting that equity at a discount and, you know, ah essentially it's a little opportunistic. You are taking advantage of somebody's need for liquidity, but, and obviously there is risk.
00:49:10
Speaker
ah Why is he looking for exiting is always a question you're wondering about, but I mean, could be an interesting space to build in. No, no, I think, I think again, right. It's, it's, it's, it's lot more nuanced than that. It's opportunity, fine. I mean, every financial product is an opportunity in some sense, right? Whether it's primary or secondary and so on.
00:49:29
Speaker
ah Here, you know, I want to clearly make the distinction between you know This is not somebody doing a distressed sale. It's not about someone saying I want liquidity. I'll give you an you a very simple example. right If you look at employees in particular, i somebody may have like 2 crore worth of options.
00:49:51
Speaker
you know And if the company allows him to let's say liquidate 25 lakhs. Now maybe this pays for the EMI for his house.
00:50:03
Speaker
so Yeah, it's a life-changing amount. Yeah, it's it's it's for different people, it it means kind of different things, right? You know, the larger secondary umbrella, which actually buyout funds, there are buyouts, you know, of LPE interest, there are buyouts of GP interest, there are continuation funds, specific asset-based funds, you know, there a lot of those kind of things which happen at a way later stage and there are distressed funds companies which will look at buying assets just to turn them around. All of them come under the umbrella of secondaries.
00:50:38
Speaker
So now when we look at things we are looking at it more in terms of adding value to the the ecosystem and and discount is small piece in that and that a whole thing.
00:50:53
Speaker
You know, you are able to retain people because there is more confidence in the ESOPs that you've given and and you are liquidating very small portions. you know, this is by no means um I would compare this to a taking advantage type of sale. Ultimately, otherwise you know founders would not want to do it. right you know So it's it's a system that enables them to keep their compensation costs under control, bring confidence to employees and more importantly, allow the employees to say, hey, it's your call.
00:51:28
Speaker
We are giving you this liquidity. know You want to take it, you want to take a small portion of it. And most of them, you know, do in my opinion, there's some of them may come and say, no, I'm happy.
00:51:40
Speaker
You know, my lifestyle is taken care of. I'll hold it until the end. So they're willing to take the risk. Okay. Uh, what is the reason to do the software play?
00:51:51
Speaker
and Now you told me that there are some 200 companies in that sweet spot of a hundred to 300 million valuation. ah why go through all that effort of creating a software, you know, having an engineering team and maintaining that and selling it and all of that when your target market is so small that you can just through relationships go to them?
00:52:15
Speaker
No, I think, see, when we say target market, we are only discussing target market for this current fund, right? Yes. So the the company, like I said, the vision for us is not to do this as a,
00:52:27
Speaker
fund play independently. you know See today, you know i i come from the venture world, right both on the startup side and on the venture side. If you were to start a fund, nothing stops anybody from saying, I'm going to do like a regular fund, you know three people and just do something.
00:52:44
Speaker
you know For us, the vision is not this fund. The vision is how do we enable private market transactions. right So, which means without having a very strong tech built layer, you will not be able to do it in the timeframe and the efficiency that you want.
00:53:02
Speaker
I mean, go back to the old days of public markets. right you know You had NSE and BSE as stock exchange. Now, you needed a broker, you needed these slips, they would go punching on their systems that were given and so on.
00:53:15
Speaker
And now if you see the evolution of the public markets in India, you know, there is NACBSE and then you started the broking stuff. You have the Zerodas and the Groes of the Mothilalos Falls of the world. There depositories, which is the CDSL and NSDL. There is clearing house, there is RPAs.
00:53:30
Speaker
Now, all of these guys are the ones who are enabled... ah in know that architecture is what is enabling you to do your T plus one settlement. Otherwise, it would have been impossible.
00:53:40
Speaker
And this whole, you know, Harsad's meta scam has its root in that 15 days it takes to actually do your settlement. Right. So, if you take a parallel from something like that, now what happens in the private market if if tomorrow we say, hey, you know, there is this technology platform where every company has digitized their equity.
00:54:03
Speaker
If companies in this particular range and for this particular asset wants liquidity, KISA fund is one of the options. Tomorrow where we are going with the tech is trying to build this as an engine where a third party capital could be provided.
00:54:18
Speaker
Somebody could discover the assets on our platform and say, here is my thesis, here is the capital that I want to provide. Here are the shareholders have you have. Can the company and investor work together to make this happen?
00:54:29
Speaker
So, for us, the vision is to build a private market setup of some side. I mean, if you are familiar with how um the US Nasdaq private markets works, you know,
00:54:40
Speaker
That's one place, that's the direction that we want to go. Eventually, do something which will make transactions in private markets, you know, lot more easier, lot more friendly, lot more sharper, you know, quicker and on and so forth.
00:54:54
Speaker
And that is not possible if you go to the old way. And our public markets are a good lesson on how that can enable something of this kind. Okay, interesting.
00:55:05
Speaker
ah What is Nasdaq Private Markets? I'm not familiar with it. So Nasdaq Private Markets is, you know, owned by Nasdaq, which is the you know, in the public market system there, which essentially does private market transaction.
00:55:22
Speaker
So, you know, ah you can go to a company, create tender offer, take the tender offer, go shop around for investors. You know, obviously you need to have regulatory support for that framework, which I think even in India will come eventually.
00:55:38
Speaker
It's not there right now. but but But there's like a large ticket size transactions or like even... It's it's a it's aggregating retail into large transaction.
00:55:49
Speaker
Okay. When I say aggregating retail, you know, it could be again in the form of a tender offer for employees or existing investors. ah Largely, fund to fund buyouts, even now everywhere ah happens offline.
00:56:04
Speaker
Right. There's a lot more deal structure into it, you know, especially if you're slicing and dicing your assets. So, if you kind of look at the secondaries at large, you will see this LP late secondaries, GP late secondaries and so on and so forth. It's a lot more complicated situation.
00:56:20
Speaker
you know, world. um Eventually, I think we will get there with, um you know, our own set of regulations and so forth. For us, the aim is to be able to do that.
00:56:30
Speaker
And this is the one step in that direction. That's why you see building the tech and, you know, and and all of that. Got it. In fact, if some, you know, and it's it's funny that you asked me that because if somebody had already built it, you know, I would have actually gone the fund manager route.
00:56:48
Speaker
and I would have said, okay,
Hissa's Vision for Private Market Transactions
00:56:49
Speaker
you know, let me work with these guys and and, you know, why do I have to build everything? Somebody's already kind of you know, built the infra for this, right? Unfortunately, that infra does not exist, you know, so we ended up having to, you know, build it.
00:57:04
Speaker
But I think if that is not there, this will become like a small fund and higher our play, you know, so to speak. Interesting. So essentially the fund is just a way to seed liquidity into this market and...
00:57:23
Speaker
Show proof of concept and so that more capital comes in through other vehicles and it becomes an established ah investment product. Correct. Correct. So, we you know, we are seeding now. I mean, we will continue to raise, ah build more funds as well.
00:57:41
Speaker
But, you know, i mean, who's seeing the future, right? And I'm saying the the idea is that it needs to get into a place where participants of the private markets which are your shareholders, small, largely small shareholders, the company as a custodian of these shares and people who will want to buy into these assets.
00:58:04
Speaker
If we can bring all of them together and build that platform, then I think we've kind of reached what we dreamt of. Okay, interesting. In the longer term, essentially, like every founder is doing wealth building. How much of your wealth building do you think will come from the platform and how much will come from the fund?
00:58:28
Speaker
Well, I think, a you know, it's hard to answer that question right now because the fund size is small. You know, tomorrow if we decide to, you know, do a larger fund, you know, then things may get different. But if we start to look at product specific smaller funds, you know, then the company has a um you know, as as the market or the marketplace or whatever you want to, you know, call it, of will build lot more value than then this individual. I mean, these individual assets would be people coming in, going out in terms of as a pure play financial product.
00:59:03
Speaker
You know, think of it as mutual fund house having a whole bunch of You know mutual fund each one of them have their own written profile this profile But the AMC at large has a larger play then then just the collection or the sum of its parts Okay, okay like the fund one is a growth stage ah focused fund and maybe you could have another like a pre IPO fund or a stage fund or you could or you could try and attract other people to create such funds and be the platform where they ah do the transactions?
00:59:39
Speaker
So we will we will do that regardless, you know, because the you know there is never going to be, you know, one fund that let us all need, right? We do want more people to participate and so on.
00:59:49
Speaker
So whether we do additional funds of what size, you know, what is the exact product, it doesn't really matter. We will definitely encourage other people to bring capital, use the platform and then and then build from there.
01:00:02
Speaker
Okay, tell me about how ESOPs work and why does a company need SaaS tool to manage ESOPs? Okay. Let's start with the ESOPs 101.
01:00:14
Speaker
Okay, so ESOPs essentially um are instruments that are given to employees. And again, I'm using the word instruments in a, you know, I mean, being around these lawyers, I've begun to use these these terms, you know, rather than simple simpler English.
01:00:32
Speaker
So fundamentally, it's an option that's given to you to buy the shares of a company at some predefined time in the future. So you can think of it and in very simple ways that so if you are an employee who is joining ah new startup and the startup says, hey, I have 100 options given it to you, which means that you have an option to convert this 100 that's given to you to 100 shares at some point in time in the future.
01:01:00
Speaker
So what is that point of time in the future? That is called Vesting. So, many people tied to time spent in the company, some people tied to milestones that the company delivers, some combination of your own personal milestone and company's milestone and some a combination of milestone and time based.
01:01:21
Speaker
Largely, the US model which is adopted here is what is called a four-year vesting period, equal vesting um monthly with one-year cliff.
01:01:38
Speaker
Now, cliff essentially means that until you spend the amount of time that is equal to what is defined as cliff, you will not get any options. So, the US model is four years vesting. So, if I give you 100 options, it will vest over period of four years with a one-year cliff.
01:01:56
Speaker
which means that if you leave the company within 12 months, you get nothing. ah But once you cross 12 months, 12 months worth of options will get vested.
01:02:07
Speaker
So this 100 divided by 4, which is 25 options get vested. Thereafter, either every month or every quarter, either 148th or 148th, hard equal into a quarter gets vested and moment you hit four years, all of your options now would have been vested.
01:02:29
Speaker
So, vesting means that now you have you can convert your options into shares. but But you have to buy those shares. So, that's the next step. so So, when you are vesting, you don't have to pay anything.
01:02:42
Speaker
you know Now, there is a next step called exercise. Now, you have the Now you have earned the right buy but you still haven't bought them.
01:02:52
Speaker
So the process of buying is called exercise. So there will be something called a strike price associated with every option. So you pay that strike price and buy these options or rather convert these options into shares. That process is called exercise.
01:03:08
Speaker
So there are two key components here. One like I said is the strike price. okay So, if let's say a company gives you at 10 rupees a strike price, then your 100 options at the end of 4 years, you pay 100 into 10, 1000 rupees and exercise.
01:03:22
Speaker
But there's a very key point here, which is how the taxman looks at this. like Any shares that are given to you now is considered a perquisite.
01:03:36
Speaker
Now, what is the value of the perquisite? The company gave it to you at 10 rupees. But the value of the perquisite is calculated based on what is the fair market value of these shares at the time you exercised.
01:03:49
Speaker
So let's say company gave it to me at 10 rupees and the time I exercised it is 1000 rupees. So the 1000 minus 10, 990 rupees is treated as perquisite in your hands and you are asked to pay a perquisite tax on it even though you have not made money.
01:04:06
Speaker
Now this is comp paper money because there is pay money, but now, but to the tax guy, you have to pay real money, right? Yeah, so the the asset is in your name. So asset is in your name and asset was deeply discounted.
01:04:20
Speaker
You know, because the fair market value is 1000, but the company gave it to you as 10. Now the 990 is as, is stated as perquisite. Now you have to pay perquisite tax. Now perquisite tax is equivalent in today's world to your regular income tax, whatever is your... but you know why Why exercise then? Can't you just keep them unexercised and when you want to actually exit then you exercise?
01:04:44
Speaker
great Great question. right so that now If this is if ah an employee has to pay from his pocket you know to pay taxes for an asset which is still paper, no employee will want to pay. and Because now all the risk is on you. right So why would you even exercise?
01:05:03
Speaker
The only reason for you to exercise is to come under a better tax regime when you eventually sell. Okay.
01:05:15
Speaker
So what it means is that since any share you know since um and he said purchase or sale, any gain that you make by the sale falls under capital gains and capital gains is structured as long term capital gains and short term capital gains.
01:05:34
Speaker
Now, long term capital gains obviously has a smaller tax play. Short term, you will have to pay a higher tax bracket. Now, to optimize on that.
01:05:45
Speaker
I think long term is 10%, right? Long term unlisted securities is 12 and a half now. Okay. You know, and short term is stated as regular income. Which is like 25-30% depending on, I mean, if you are the highest slab, then you would be 30%. And if you include surcharge and all that things, and if you happen to cross, I think 50 lakhs or a crore just because of this, you will probably at like 39.5%.
01:06:14
Speaker
ah Oh, wow. Okay. Okay. and And with the last year's budget, the long-term capital gain for unlisted securities, I think is 12.5%. Right? So, there is a significant difference between short-term cash.
01:06:28
Speaker
But are you willing to take that risk? So, most often, almost, unless you really have clear idea that I know that the company is going to go somewhere and I am supremely confident people don't exercise.
01:06:48
Speaker
Okay. Now that gives you an opportunity for a different product. You know, we'll talk about it some other time, but you know, because there is so much of but tax issue here, know, somebody can actually lend you money to pay the tax.
01:07:04
Speaker
Okay. That itself will be another product. you know, Now coming back to this, people don't exercise. ah You exercise ah early on so that the 30%, 40% tax rate is on a smaller amount.
01:07:22
Speaker
Because the and and i appreciate the the more is the amount on which you pay income tax regular instead of LTCG. ah so So that's why you want to exercise earlier.
01:07:35
Speaker
No, no, you want to access early because your tax liability on whatever you make is lower. See, what do you make, you know, pre-tax will be the same. None of this will matter, right?
01:07:47
Speaker
So, if you doing a short-term, if it is going to be treated as short-term capital gains, you know, then you end up paying 39.5%. thirty nine point five percent Okay, long term capital gain is 12.5%.
01:08:01
Speaker
And then long term capital gain can also be used to offset against another capital purchase. So if you end up buying, let's say a house with the money that you made, you know, from the amount of liquidity that you got here, right, you actually pay zero tax.
01:08:21
Speaker
Okay, so interesting. So there is a tax arbitrage product opportunity separately. Right. Especially within, you know, I think the current regulation is within three years or within two years of you getting, selling your shares.
01:08:36
Speaker
um If you buy another capital asset, you buy a home. And think again, that comes with some restrictions. You know, if if you already have a home, then I think it does not qualify. But if you buy a home, then you could end up with, you can structure it in such a way that you have a zero tax bill.
01:08:54
Speaker
Okay, interesting. but But again, long story short, there are benefits of exercise, but you really need to take the risk or you know or you need to have a real visibility ah because now the liability, ah you know you since you end up paying tax at the time of exercise, and know the tax liability is is your issue now.
01:09:13
Speaker
Because of that, majority of them don't exercise. They exercise when they know that they can eventually sell. you know And that if when I say eventually, actually eventually it is not the right word. You know that you can immediately sell.
01:09:27
Speaker
you You exercise today, you sell tomorrow. Or within whatever small time period where you kind of know that you know you will have cash. It's a short thing. that yeah you know okay okay okay So, there is another second nuance to the exercise and this kind of depends on how companies define their policy.
01:09:47
Speaker
You know, what happens if you leave the company? As long as you are employed in the company, your vested options can remain vested options. The original US model again was that you have to exercise within three months of you leaving the company or all your vested options will lapse.
01:10:04
Speaker
Now, the reason why that structure was kept was there was also a tax rule in the US. There's something called an incentive stock option and a non-qualified stock option. and the go And the regulation said was you could only have an ISO as long as you're an employee or you've left within three months. After that, automatically converts into an ISO and new tax stuff comes up. It's fairly complicated, right?
01:10:28
Speaker
Now, unfortunately, everybody just borrowed that straight away here. right you know ah Without any of those tax complications. right So, um if you don't exercise within three ah three months of leaving the company, all of that will be lapsed.
01:10:42
Speaker
Now, in some ways, this works as a deterrent for employees to leave as well because you've stayed there you know and you want to have a shorter and exercise period.
01:10:55
Speaker
And now that you know that you don't have the money to pay the tax, you will end up losing everything that you've kind of earned, right? So there is some logic to it, though I personally don't buy into it 100%. I think we need to structure it a little differently where at least for people who stayed longer, give them a longer exercise window.
01:11:15
Speaker
So the most employee friendly approach is giving them a 10 year exercise window. which essentially means even after you leave the company um for a good number of years, you can keep it as vested options. There's no obligation to exercise them.
01:11:33
Speaker
And moment you know that the company is going IPO, you will also be included in the and you know in that liquidation process. So you can then exercise and do. I think the correct solution is somewhere in between.
01:11:45
Speaker
Maybe have a floating window where depending on how many years you've being part of the company, you allow them you know that much amount of time.
01:11:57
Speaker
The 10 years plan is now getting more and more used in the US. ah And I think some of the employee friendly founders are doing that as well. I think that's a that's great for you know it's a good way to retain employees.
01:12:18
Speaker
and Using this as a retention tool, I think only serves the purpose in a very small way. You just want people to be there because they passionate, want to build it and and so on.
01:12:28
Speaker
I think anything upward of 5 years of time, I believe is a is's a good employee friendly mechanism. So that was one of the reasons why you would even think of should I exercise or not.
01:12:43
Speaker
um and What did I not cover? we so we talked we We talked about four years, right? Four years with one-year cliff. ah The one-year cliff is mandated by law.
01:12:54
Speaker
ah You don't have an option around because you are letting employees get in at a very low price. we want to make sure that there's some conditions that are attached to it. And the regulators look at it and say, hey, since ESOP is a long-term incentive, know you know don't tell me you want to give this for somebody who doesn't even stay for a year.
01:13:12
Speaker
you know Now, complications arise there in terms of how much vest every year. you know The simplest mechanism is if you are having a four-year plan or a five-year plan, divide that by the number of years, spread it evenly across the years.
01:13:27
Speaker
um There are some companies who do back-loaded vesting. So what I mean by that is, you know instead of equally- 10% per year. Yeah, 10, 20, 30, 40.
01:13:39
Speaker
Depending on the type of company, there are some merits in it. and know If you are at a very early stage where, let's say you're a deep tech company, right the company takes several years to get built up.
01:13:52
Speaker
So you want to reward people who stay through this experimenting phase. right So then something like a back load investing you know makes sense.
01:14:03
Speaker
um But these are things that you have to work with the company, understand what they want to do and then build the policy. So essentially you have an ESOP policy which says, and know how do I decide how much to give? How do people earn it? Is it time based, milestone based or a combination of that?
01:14:20
Speaker
What is my exercise policy when the employee leaves? And is there some liquidity programs that I would want to run? So the commercial considerations largely are around this.
01:14:33
Speaker
The legal considerations are more in terms of what kind of instrument, are they cash settled, are they, you know, stock settled, you know, some little nuances about, you know, how these things work.
01:14:45
Speaker
so So the second part of the question was why use a platform, right? So now, If you look at employees in India especially, right, were part of the startup workforce, they are getting exposed to equity as an asset class You know, if you look at penetration of the Indian in the public markets, that number is gradually been growing and post-COVID, the growth has been probably the fastest.
01:15:20
Speaker
So now, Even even with that, the understanding around basic concepts of equity, how does it work and so on is very, very, very, very poor.
01:15:33
Speaker
you know So, most of the times people give them a stock option agreement, 20 page agreement, it's got some tables, you know they're just not able to understand and convert that into simple rupees.
01:15:44
Speaker
you know At the end of four years, yeah how much will I get? If the company grows like Google, can I make something? and may not So, they these are their questions. right Ultimately, you know you if you look at it from a wealth perspective, how do I understand what this means?
01:15:59
Speaker
There's way too much legal jargon. Second, and again I'm talking from one part of it, which is the employee side of it. They need some system which will kind of help them understand, and which they don't have today.
01:16:10
Speaker
Secondly, lot of our entrepreneurs are first time entrepreneurs. And even though they are coming from business houses in India, this concept of sharing wealth with employees did not exist in the previous generation.
01:16:26
Speaker
like So even they do not know how to actually give ESOPs to somebody. What does it mean beyond going to a law firm and saying, hey, get me one ESOP policy, which is compliant with the law. right So what do they do? They go ask their other friends who started their company saying, hey, what did you do?
01:16:46
Speaker
They'll say, I don't know. I asked this guy and we made some changes along the way and so on and so forth. with more and more investors coming in who are a lot more educated about this topic. they Typically, when an institutional VC comes on board, they'll say, hey, here's how you do it.
01:17:00
Speaker
I'll get this much pool for a company of this type. You don't have some key skills in it. If you have to hire them, you need to give them something of this kind. um So, you all of these are like random conversations that happen.
01:17:13
Speaker
We've seen... um companies at an early stage giving 2% of the company into a consultant, you know, who did SEO for them for 12 months.
01:17:24
Speaker
Right. So all of these add-on things has got to a point where people in either don't know, you know, how to do it, end up copying somebody and without looking their own issues and their own structures or you know, get into this stuff or where they gave some insane amount of equity, you know, to somebody outside. mean, i I was looking at this um one controversial short tank episode, you know, I don't know if you remember, somebody said I gave 30% to my CA because he built my business plan.
01:18:04
Speaker
you know so and um And these are real problems. right So the the reason why they need to use a platform is primarily for that. Figuring out what are the type of structures that are available, how to allocate what to whom.
01:18:18
Speaker
And as you start going more towards using sophisticated forms of testing, for example, I want 75% to be time-based, 25% to be based on company's performance and depending on how much of percentage of that company and performance was made, an equivalent percentage will be given to you.
01:18:40
Speaker
Now, all of this requires some sort of a tool to manage, you know, otherwise you will go crazy as in a moment you cross 15-20 employees.
01:18:51
Speaker
That's the reason we tell them that as early as possible, begin to use the system. ah You are able to understand how your cap table would look like, what percentage of wealth is given to employees. Employees will be able to understand what they are getting and how their wealth is growing as the companies you know grow forward.
01:19:08
Speaker
So it's absolutely essential. um Anything less than 10 employees, is it required? If they're doing plain vanilla stuff, it's really not required.
01:19:19
Speaker
But we still encourage them to use it, you know, because up until a sudden structure, you really don't pay anything for the platform. So it's an additional expense for you. But the idea is that moment you use a platform you are aware of what the wealth generation is, how employees perceive wealth, how as you continue to raise money you can showcase that you know the value is getting kind of built for every single asset class and that is very very hard to do without platforms or without a piece of software whatever you want you know call that.
01:19:56
Speaker
So basically the employee has like a self-service login where he can see, okay, this is on paper. I have created this much wealth in the organization, which is a huge motivator for them.
01:20:08
Speaker
Does the product come in after
01:20:13
Speaker
does the product come in after you know't Typically, companies, startups would use some, maybe a lawyer or a ESOP consultant to help them structure it. So does the product come in after that? Or do you also come in before that in the services part of it in terms of every company has like a unique set of needs. So understanding and then advising, this should be your ESOP structure. So do you come in at that stage or after that stage?
01:20:39
Speaker
No, no, we come in before. We come in when, you know, absolutely no planning has been done. So essentially they are, so there are two, three parts to it, right? One is have not raised any money, right?
01:20:54
Speaker
But I want to offer some ESOPs to people that I am hiring. And you will not believe, people will just give random letters. You have 2% of the company. You know, there's no policy in place. You you know, nothing is there in place, right?
01:21:09
Speaker
But you've given these letters already. Okay. So we come in the best point for entrepreneurs to use us is moment they think of any employee you know, being the recipient of an ESOP, we can start engaging with them at this that point in time.
01:21:27
Speaker
You know, the steps are to create a policy, make sure that the share existing shareholders may be just the founders, but they approve the policy. So you, because you cannot give ESOPs until the board and the shareholders approve an ESOP plan, right?
01:21:42
Speaker
So your date starts from that particular time. So even if somebody tells you that I have given you 2% ESOPs, you know, it was starting the day you joined.
01:21:52
Speaker
If you don't have that board approval and shareholder approval, you your clock does not start at that time. And most employees don't understand this. Okay. So the best time to engage is moment it gets into your head that, okay, I want to give these outs to someone.
01:22:12
Speaker
when an institutional investor comes in, they try to formalize the process and say, hey, create a pool, keep this pool. If you have not done it before, now you have to do it and because you now have to hire the team. So some Some of the entrepreneurs start to look at the ESOP only when an investor comes on board.
01:22:32
Speaker
And some of them, you know, they've grown big, they know what it, they try to do it using Excel sheets, but they can't do it anything anymore. So they now we want, they want to use a platform, they come and look at the platform.
01:22:44
Speaker
So there are different companies enter the platform at different points in time. The ideal situation, like I said, is for you to come at, at the earliest. So we have a team internally which does your ESOP policies and these are professional lawyers.
01:23:02
Speaker
Although we are not a law firm, these individuals are lawyers, they help you make sure that the plan is compliant. ah We do get ah give a lot of free stuff um People can come to our website, download a proper compliant ESOP plan and get started on their own.
01:23:18
Speaker
um We help them figure out a compensation planning for them, understand you know how they're looking at their existing compensation structure, what do they want to ah spend on cash for the next few years where the ESOPS can be paired with.
01:23:33
Speaker
We help them do benchmarking. We do benchmarking ourselves to help what are the industry standards in terms of ah how do you do the cash to options ratio?
01:23:44
Speaker
um What is an ideal vesting period? What kind of companies, what kind of sectors use, what kind of vesting and so on and so forth. so So there is an entire consulting layer, um largely because Our current founders um are not in a DIY mode when it comes to this.
01:24:04
Speaker
They still need somebody to talk to and so on. Experienced founders They pretty much know the steps. They would want more help in terms of what's going going going on in the market today.
01:24:16
Speaker
What's market standard? So they want more help in terms of benchmarking. And the ones who have already used the law firm, got a policy. See, law firms work stops at creating a policy, which is making sure that this document has got all the regulatory stuff covered.
01:24:37
Speaker
You have all the supporting documents in terms of ah board and shareholder and and whatever their approvals are covered and so on. But they don't do administration, they don't do consulting around this and and so on. Some of them, you know, may do for later stage, you know, companies.
01:24:52
Speaker
um But early stage companies typically, the best use of us would be to get get in as early as possible. And as the company gets matured, then you have a little more, it moves towards more custom structuring.
01:25:08
Speaker
You know, I have a management team for them. i need to create a new policy, which is different from the rest of them and so on and so forth. Those are, as the company evolves, these structures evolve as well. And we help them through that process too.
01:25:19
Speaker
What is the subscription um pricing for Hyssa? So the ah the pricing works in two ways. One, depending on the kind of support services that you take, which is one time and what stage the company is getting into the platform.
01:25:36
Speaker
If the company already has know hundreds of employees and a bunch of things, then again, there's a one time onboarding fee that is charged when ah when they come out to the platform.
01:25:46
Speaker
post that it's all on a per employee basis you know so the per employee basis um typically again depends on the volume of employees the number of esop plans you have number of structures that you have um but effectively it starts anywhere from 50 rupees per employee per month you know all the way to about you know 200 rupees per employee per month okay And how much revenue does the platform do, the platform part of the business? Or how much would you close current year at?
01:26:18
Speaker
So, you know, the current, obviously, this year is running. um The last year revenues, we closed a little under 5 crores. know um And I think there'll be pretty decent growth going this year as well.
01:26:33
Speaker
Like a two-digit, you'll hit two-digit crores? Probably hit a little under under that. Okay. Got it. And what percentage of this is the services or the one time fees in it?
01:26:48
Speaker
um That is a little hard to tell right now because sometimes what happens, especially in in in customers where we have got in between. right um Some of them are a little concerned about what the first year subscription is and so on. So sometimes we kind of package that along with you know an initial one-time fee and so on.
01:27:13
Speaker
Right now, if you want to look at um in absolute terms, The initial consulting revenue probably would be something like about 30-35%.
01:27:25
Speaker
But that would, you know, as you sign up more, that will begin to, you know, drop. Okay. What's your go-to-market strategy for this? Like, how are you acquiring customers?
01:27:39
Speaker
So ah again, so our market ah for the platform or the software platform is largely startups, right? And unlike a typical SaaS company where you can say, i will go after an SMB mid-market or an enterprise, oh this market doesn't work.
01:27:57
Speaker
you know, that way. You basically have to cater to seed companies through their public listing. So effectively, as companies scale, you have to be in a place where you are the platform, the platform don't get displaced, right? Because this market does not work like a typical, um you know, SaaS company, which can focus on a smaller sub niche.
01:28:22
Speaker
ah So our larger Customer acquisition strategy um depends on pretty much going to all the enablers of the ah startup ecosystem. right you know Like I said, the first entry point to somebody even thinking of an ESOP for over 75% of the companies is when they bring an institutional investor on board.
Competition and Market Position
01:28:48
Speaker
you know So we kind of work through our own VC network. ah we We have a very strong network with incubators and accelerators ah where the first some sort of a touch point happens with the promoters in the external world. And in sometimes, um sometimes what happens is there are people who are part of the incubators and a accelerators were also treated as early employees and want to give options.
01:29:12
Speaker
So, three areas there, one, investors, incubators, and second, incubators and accelerators. Third, going and hitting the companies directly.
01:29:26
Speaker
Okay. and And do you have competition? Like, are there other platforms to manage and specifically Indian ones or only global ones? No, no, no. There are. There are. I mean, the the global leaders in this space is called CARTA.
01:29:40
Speaker
CARTA is from the US and they are pretty much the Probably in the US, the 80% plus market share and know type of company.
01:29:51
Speaker
Obviously, you are US is also a very mature market you know for this. There are smaller players there, um but none of them enter India. So, Karta attempted India a couple of years ago. they did acquire a business called ZenEquity.
01:30:10
Speaker
um And about a year, year and a half back, I think they shut that down because their focus was largely US and so on. ah In India, you will see us, you will see a company called Capita and you will see a company called Equity List, which is a ah spin-off, was part of AngelList India before.
01:30:35
Speaker
Now they're an independent company. And there's also another company called Trika which is part of this Let's Venture. It's very similar to Angelist type of structure. There are probably a few other smaller players but pretty much these are the three guys that you see.
01:30:56
Speaker
I think Capita is also focused a little bit outside of India as well but the rest of them are all India based. Okay. ah Do these competitors also have a similar approach of ah enabling transactions and ah in addition to SaaS or are they more like SaaS focused?
01:31:17
Speaker
it It kind of depends. Like, for example, Equity List now is a software-only company. Trika and and know if you count Let's Venture, Let's Venture does early stage, pre-seed investment aggregation and so on. right So somewhere they are also interested in the transaction, not the way we are looking at it, but at a different, more like at a primary level, they have an angel set up where can aggregate early stage capital into an angel fund and invest that into the company.
01:31:52
Speaker
So are looking at it from that perspective. Capita also has some sort of a liquidity play. They do unlisted public companies.
Hissa's Future and Revenue Streams
01:32:03
Speaker
So there private companies, there is and there is unlisted private companies by its definition is unlisted. There is an unlisted public company and there is a listed public company.
01:32:17
Speaker
So they also operate in the unlisted public company space. so they have some ah financial play there. um But I don't see anybody doing things the way we are approaching, you know, a larger marketplace, a captive fund, um you know, and building the infrastructure to be able to do in transaction but they're all in the same neighborhood if i can you know if i can say that of just getting and doing something a little more than software far in the private market space okay ah what's your ambition for hisa do you see this as a business which would like say be a hundred million dollar arr kind of a business or like like what do you see it as
01:33:04
Speaker
Well, I mean, I generally don't want to see outcome of business keeping a number in mind, right? Obviously, you will reach a number in mind. You know, if if you are ah if you were to ask me um what is our goal in terms of what we want to build, my simplest answer would be to somewhere be like the NSE, BSE of private markets, right?
01:33:29
Speaker
Now, that could mean a lot of things and, you know, there's regulatory frameworks and so on and so forth. But essentially place where private market participants can come and transact.
01:33:45
Speaker
And I'm very careful when I use these words because we're not we don't see private market trading it's not from a from a perspective of trading right it's i'm saying more in terms of transactions so in some sense what is required for something like this to happen you know you need to have nse you need to have the zero does you need to have cdsl you need to have camps all of these entities being merged into one setup which can enable this private market transactions. To me, so to me the goal is to be able to build a platform of that kind.
01:34:23
Speaker
Now, if you take a look at where the private markets are today in terms of capitalization, where it will be when when all forces come together to support something like that. You know, I think the numbers will probably speak for itself. But the goal is not for us to look at and say, hey can I go build a billion dollar company or a hundred million dollar revenue company?
01:34:40
Speaker
I think this is the outcome that we want. And from looking at the wealth that is being generated in this, I think we will build a very profitable company which will give really good returns to whoever is backing us in whatever parts of the products that we do.
01:34:59
Speaker
So, subliminally I can say that you know you will get to a very good financial outcome, but I'm not walking backwards from a financial outcome. Okay, interesting. interesting ah One source of revenue for you is the services one-time fee, second is subscription, third is management and fees plus profit share from the fund.
01:35:18
Speaker
ah Would you also have like a per transaction revenue for other funds who are doing transactions? That is very possible when the you know when the ecosystem develops and then you are in the middle of um know doing a transaction.
01:35:35
Speaker
There is a revenue model that's connected to a transaction, but we'll have to double click kind of explore that you know as as we go along. I mean, today, if you were to take a look at investment banking as a parallel, that's how it works.
01:35:50
Speaker
and know You take a piece of that transaction. Now, would that same model work when everything is digital? ah I'm sure it will, but with we will it work to the same extent? I'm not too sure.
01:36:05
Speaker
Would you hit your vision better as an independent company or as a part of it another company, like say an NSE acquires you the way you have NASDAQ private market, NSE could have a similar ambition or let's say someone like Attraction acquires you, which again is in the private market data space.
01:36:27
Speaker
yeah Like what's your take on this? Well, I think, you know, say typically good acquisitions happen when there is synergy at multiple levels, right?
01:36:39
Speaker
One business synergy, people synergy, you know, and people, when I say people, both in terms of value system and ambitions and so on. So I think it's a very hard thing for everything to come together you know and and go.
01:36:53
Speaker
And if that opportunity presents, then I think you know maybe that's worth exploring at that point in time. Because i I believe if I were to look at people who are building things in India, I think this is a great time to be building. There are people who are willing to do and willing to experiment, willing to try out you know a lot of things.
01:37:19
Speaker
So, if there is an opportunity where there is another group and us share the same vision, same same value system and so on, I think it will happen.
01:37:30
Speaker
ah you know We are clear on what we want to do. um Srini and sydney i know other for a long, long time. and and we have a lot of similar thoughts on how you know any business can should get built and how this business you know can possibly get built um so we'll see how it goes and we're very happy doing it the way we want to do it but in the process there are other people who can join forces we'll probably look at it at that point in time awesome uh thank you so much for your time satish it was a real pleasure
01:38:06
Speaker
Fantastic. Thanks so much. I hope added value to your listeners. and It's been great chatting with you.