Letter explaining ESOPs to the team

Sometime ago, I sat down and wrote down a letter to our employees trying to explain what exactly it means to own stock options in a startup. Context is that from my practical experience of talking to hundreds of startup employees, ESOPs are one of the least understood and most under-appreciated aspect of startups here in India.

So here goes (with some minor edits):

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Hey there,

I am really happy to welcome you as a co-owner of Akosha. It is both a recognition of your efforts and a huge responsibility.

First, let’s get the basics out of the way.

1. If you are not familiar with ESOPs or venture capital, please watch video recording of my talk on venture capital (internal link), because without understanding capital appreciation, you may find it difficult to grasp the value of getting ESOPs.

2. There was a traditional thought process that employees shouldn’t really value stock options. The reason for that is that all the way till 2011-12, apart from a few success stories like Infosys etc., people hadn’t really seen meaningful wealth creation for employees. All this has changed forever in the last 2-3 years and in the coming years (unless we hit a bust), we are likely to see a lot of wealth creation for founders and early employee-stakeholders. That is also the reason why you will find that most senior management folks value stock compensation while sometimes junior employees can be lazy in understanding them or risk averse towards them.

3. ESOP creation is more complicated than it seems. There are 4-5 ways of structuring (equity/preferred, stock appreciation plan / options etc), changes in the new Companies Act and lots of different tax rules applicable on employees and the company, decisions regarding acquisition, winding up or the company or IPO etc. Here are some of the things we kept in mind while creating it:

– we need to keep it as simple as possible for everyone
– the plan should be fair to employees, the company and any potential acquirer
– the plan should ensure that under no circumstances can one person’s behaviour impact the overall exit for rest of the company and employees
– we need to ensure that overall unfairness should not be there (i.e. handle cases of death, unethical conduct, illness etc.)
– any tax liability should only come when there is a corresponding cash event for a person (i.e. you should not have to pay real cash in tax unless the upside of the stock is also in cash).

4. The exact ESOP options granted to each employee is a subjective determination by the senior team. While deciding this we looked at your experience, performance, current market salary, market adjustments, your alignment with the company’s goals, your thinking/flexibility, attitude etc. Every time, we’ve tried our best to be fair and reasonable and generous.

Here are some of questions that people are likely to ask around ESOPs:

1. What is a stock option?

A stock option is a share in the company. As the value of the company increases, the value of the shares of the company increases. A stock is granted by the company by issuing a grant letter.

2. What is the vesting period?

Stock options are granted over a period of 4 years with a 1 year cliff (which means that if you leave before the end of the first year, you don’t get any stock). Post the end of one year, the stock options vest 25% each year till the end of year 4. The vesting happens monthly. In many companies the vesting happens 10%, 20%, 30% and 40% over 4 years. We went with 25% yearly. This applicable for the current grants but might change in the future.

3. What is the exercise price?

To keep things simple and give the maximum value to you, we have kept the exercise price at Rs.X per stock option. It is the price will be adjusted against any sales proceeds at the time of sale of your shares to an acquirer or during an IPO.

4. What happens to my stock options in case I leave the company?

All stock options which are vested will remain with you. All stock options which are unvested will lapse. You will not be required to exercise any of these options at the time of leaving, unless the context otherwise requires.

5. How did you calculate the number of options in my case?

Whatever amount of ESOPs was promised to you during your discussion with your reporting manager, we simply divided it by the valuation of the company as specified to you on that date. Then we calculated the number of ESOPs.

Let’s say, hypothetically, a company has 10000 shares and the total value of the company is Rs.10,00,00,000 (Rs.10 crores). If you are promised ESOPs worth Rs.1 lakhs, you will get 10 options.

Different people are granted ESOPs at different stages depending on context, performance, when they joined etc. The earlier you are part of the company, the better the outcomes for you.

6. That’s okay, but the number of options sounds really low. My friend got XXXX options!

Yeah, we spoke to our consultants. One of the things that a lot of companies do to make the options look more meaningful is to simply do a share split (i.e. split a Rs.10 share into 10 shares of Rs.1 each) and then issue the options. Materially it doesn’t change anything.

So in the above example, let’s assume that the company is worth Rs.10 crore but the number of shares in the company were 10,00,000 (i.e. 10 lakhs instead of 10,000). So suddenly, you will end up getting 1,000 options (instead of 10 options) though economically nothing has changed.

Instead of artificially splitting the stock, our advisors told us to not do it and keep it simple.

7. What kind of returns should I expect?

No one knows. If we work hard and succeed in building a great company, the upside can be immense. But make sure you don’t spend real cash or change your lifestyle based on this.

8. When will I see the money?

Money or liquidity as it is called will only come if and when either of the following happens – a) when someone buys us; b) we IPO. Both events are not predictable and usually involve a long and arduous journey to get to.

I hope I have answered most of your questions but there are bound to be more questions. A lot of the people are still not clear about ESOPs and please don’t hesitate in asking questions. We’ve retained faith in you that you would have to confidence to ask us if you have any questions.

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Now, the responsibilities bit.

Our goal is to include as many people as possible in equity ownership – we want to change many lives and create wealth for everyone. However, this comes with responsibilities.

– we expect you to have a very long term outlook. Companies take 10-15 years to build and a lot of learning and wealth creation is loaded towards the back i.e. it happens in the later years. Patience and perseverance are your friends.

– we expect you to put the company before yourself. It is sometimes tough to do this but this is expected in a lot of different ways.

– we expect you to be wise. Wisdom is difficult to define. It includes not falling for short term gains, being loyal, having the ability to talk about issues, having the right mental models, being calm in face of adversity and sifting signal from the noise.

– we expect you to have fun. Work is the most underrated form of having fun and I truly believe that. People who have fun at work are generally the happiest. If you not having fun, talk to someone and fix it.

– we expect you to be honest. As owners, you think and behave honestly both with other owners and with yourself.

You will find enclosed the following documents:

1. ESOP grant letter specifying the number of options granted to you; and
2. ESOP Plan document containing the detailed terms and conditions of your grant.

That’s it. Let’s enjoy this ride together.

Welcome aboard.

Ankur

 

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Bundling and unbundling – learning from the China trip

In August 2014, Benedict Evans (considered one of the foremost thinkers on mobile and all things related) wrote a blog post called App unbundling, search and discovery. It is a really fascinating post and one which a lot of PMs around the world would have read. One of the key things he talks about is how WeChat and Baidu have been able to successfully bundle several features into messaging and maps respectively.

In March this year, as we were gearing ourselves for the next stage of our evolution as Helpchat, there was this question that really kept hammering at us. As Helpchat, are we trying to bundle too much? Will the Indian user be like the American user (preferring more or less unbundled apps) or like the Chinese user (preferring more or less bundled apps)? Would we end up competing with apps which serve a specific use case? E.g. would users book cinema tickets on a dedicated app or book it on the same app on which it might see cabs, food, laundry etc. There are no right or wrong answers in tech and sometimes mental models only go so far.

So, Avinash from my team and I went to Hong Kong, Beijing and Shanghai to understand more about the Chinese internet market. The agenda was to also spend time understanding the WeChat ecosystem and generally test the hypothesis of bundling in Chinese apps. A lot of the meetings were arranged with the help of Sequoia’s team in Singapore. We did 10-12 meetings on the 4 day trip.

Here are some of the things that we learnt:

WeChat

– WeChat has mainly 3 tabs – messaging, feed of friend’s updates, payments or commerce. It’s like a combination of what Facebook, WhatsApp and PayTM might look like here in India.
– Apart from the main use case of messaging friends, payments was the other killer feature on top of which other things were based. Users were using the product for a lot of peer to peer payments or gifting (apparently, WeChat Wallet created a campaign around China’s gifting season and creating a viral loop to attract more and more people to use WeChat Wallet).
– Large corporates had subscription/service accounts but most of the updates are left unread by most users.
– A lot of SMBs had created WeChat channels (similar to having a Facebook page) and were using it generate business for themselves. (The challenges of doing this are exactly the same as Facebook where getting people to like your Page and also buy from you requires you to build a huge audience using content, generally not possible for most SMBs).
– The feed of friends’ update did not yet have an EdgeRank kind of algorithm and also did not have any updates from businesses
– Because of payments being integrated so beautifully, the users propensity to use the app for commerce was much higher.

After talking to various people, what we understood is that the primary use case for WeChat users is P2P messaging, feed and payments i.e. people prefer to use it to chat with friends, see their updates and pay their friends. Users don’t see WeChat as a shopping destination and actually use specific apps for most of the other use cases. As one user we met put it, “The commerce tab is just leakage and we only go to the app to check messages from friends”. In a way the similarity between Facebook and WeChat is striking – when we think of Facebook we don’t think of it as having bundled commerce into my social network. In fact despite various overtures for doing commerce using Facebook pages, the users don’t really see Facebook in that way. So while it is bundled in terms of features, it is not truly bundled in terms of user perception or usage.

Of course, at the scale WeChat and Facebook are, any kind of “leakage” of users towards commerce itself would be worth a lot of $$$.

Baidu

– Spoke to several users who use Baidu Maps and none of them really use any of the bundled features which come along with Baidu Maps. E.g. if you search for directions from point A to point B, Baidu lets you book, say, an Uber. It seems that users are only using Baidu to search for directions and then going to the Uber app to book a cab. The person we met said: “No one clicks on book a cab inside of Baidu Maps”.

Xiaomi
– Met a senior PM guy and when discussing whether the Chinese user was different and what made him more open to using bundled services v. his American counterpart, he didn’t really feel that the Chinese user was really that different – they also wanted an app to do something specific. Also, the concept of bundling and unbundling itself is so difficult to define – Slack maybe an unbundling of colleagues-messaging on WhatsApp (something quite common in India) but one may not always see that. (Since the trip, more recently, someone suggested that Slack was going to bundle Dropbox into itself over time). So these models may not always be useful in understanding or predicting the future.

Conclusion

We met several other companies including some companies which consult businesses to market on WeChat. After reconciling thoughts from these various meetings, here is the conclusion:

– the only thing that matters is – “What is the MAIN reason the user has downloaded the app for?”

So if the app has been downloaded for a bundled use case (e.g. I can book flights AND trains AND buses from the same app), it never strikes the customer as something odd. Similarly, if the user downloads the app for an unbundled use case, bundling new features doesn’t generally work (e.g. food into the taxi apps – Ola/Uber) because the user doesn’t really feel that that is what the app is for.

And this was an important lesson for us. As someone building a horizontal platform for helping consumers to connect with businesses and get things done, we needed to make sure that the customer actually downloads the app for that reason and the best way to subsume all of those use-cases in the customer’s mind was to call it a personal assistant.

So if you want to bundle somewhat discrete use cases in someway, make sure you are able to communicate them in a holistic way (preferably using a simple noun like travel, personal assistant etc.)

PS: Since our trip to China and us rebranding to Helpchat in June, a lot has changed. Some of the thoughts I have mentioned above had been formulated during the China trip and then reaffirmed now that Facebook has launched M, a personal assistant and so has Baidu.

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Some thoughts on building a team

Of late, hiring has been a topic that comes up in every conversation with a fellow entrepreneur. It took me some time to think about how we built the Akosha team. I am a first-time, single (non-tech) founder in Delhi who luckily found several super-smart people to join and become co-founders/VPs. Obviously these thoughts reflect my personal experience.

Here are 2-3 interconnected thoughts:

You don’t find the best people, they find you: For some reasons, despite a lot of aggressive hiring efforts (distribute the JDs, use recruitment firms, search on LinkedIn and Naukri, having an elaborate interviewing process etc.), the best hires at Akosha have been people who just came across us, liked the idea and just applied or wrote a mail to me. So, while there is no way to avoid the hard work, finding that really good person (someone who is your equal in terms of passion, intellect and drive) to come and become a pillar of your startup is not really in your hands. So maybe you shouldn’t even go out looking for that kind of a person but concentrate on hiring the other people in the team.

E.g. Vishal, our CTO, was the 109th person I interviewed for the CTO position but he just randomly came to us because he had a complaint. He saw the position open and just hit reply. I saw his CV, and I knew he was the right guy. Same for our marketing head, Kali. I spoke to so many candidates, but randomly Kali wrote in one day and we moved fast from there. Avinash mailed in with his presentation to me.

So don’t try to find a co-founder/VP level guy. It will just happen. Concentrate on the other things.

Nothing succeeds like success: Traction is by far the most influential reason for us to be able to build the team. It’s a chicken and egg problem and that’s why when you raise money, it doesn’t change things directly – hiring is still difficult and throwing more money at the problem doesn’t solve it. So the thing to do is not to go hiring, but to start using the money to get traction, make sure you tell the world about it and attract great people.  A lot of stuff happens in parallel, but bottom line is to focus on traction and let the best people find you.

They are odd people: We went out for a drinks session with some recent hires, and when they were sufficiently sloshed, we made then tell us the weirdest/funniest stories about themselves. From all the stories/anecdotes, it was obvious that all of them were very odd people (odd as in they had done things in a way in their past life which “normal” people rarely do). One guy ran away from home after 12th to pursue life in another city; one guy had hitchhiked from Amsterdam to Paris when he was 19 (and claims that there was a threesome on in the car as well); one woman decided to break her engagement 10 days before her arranged marriage to marry someone she loved; another one from a conservative Hindu family/city, married a Muslim boy; one IIT guy had found innovative ways of coping up with English medium education after studying in Hindi medium till 9th; one guy collaborated with his dad with make his grandfather believe that his love marriage was in fact an arranged one etc. etc. As stories pored out, it showed that all these people had thought independently, been impulsive, taken risks and followed their guts at some point(s) of their lives.

I don’t think it is easy to check for this oddness during a formal interviewing process but I think there is something in these people that leads them to work with startups and give founders a chance. Maybe you can get potential hires (who have cleared a couple of interview rounds) to meet informally outside office and get them to share their life stories.

All in all, working with the smart people gives the most amount of satisfaction to me; but it has taken quite a while to get all those people to join.

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What makes entrepreneurs entrepreneurial?

One of my investors recently shared this awesome paper: What Makes Entrepreneurs Entrepreneurial. The paper led to the concept of “effectual thinking” which has 5 core principles (copied from Wikipedia):

  • The Bird in Hand Principle. Entrepreneurs start with what they have. They will look at who they are, what they know and who they know. Their educationtastes and experience are examples of factors which are important in this stage. Besides these examples this is also the stage where entrepreneurs look at their 3F’s, better known as friends, family and fools. From this point they will look at their abilities. So an entrepreneur does not start with a given goal, but with the tools he or she has.
  • The Affordable Loss Principle. An entrepreneur does not focus on possible profits, but on the possible losses and how they can minimize those losses.
  • The Crazy Quilt Principle. Entrepreneurs cooperate with parties they can trust. These parties can limit the affordable loss by giving pre-commitment.
  • The Lemonade Principle. Entrepreneurs will look at how to avoid contingencies. Surprises are not necessarily seen as something bad, but as opportunities to find new markets.
  • The Pilot-in-the-plane. In this stage all the previous principles are put together. The future cannot be predicted, but entrepreneurs can control some of the factors which determine the future.

Before the Lean Startup fundas came along and established a simple methodology for starting a startup, this paper must have been an awesome piece of work (laying down expressly what entrepreneurs’ intuitively do). No wonder, Vinod Khosla’s handwritten notes say, “First good paper I’ve seen”. That’s a quite a compliment from a guy who would have read tons of papers in his life.

The paper helped me understand my own behaviour better. Most of our strategy just evolves as we go along, decided by what we get exposed to, whom we get to know, what new consumer/enterprise needs we identify. If it comes across as lacking a proper product/company vision, then it is actually true, except the whole premise of having a vision like that might be wrong. A lot of that stuff is applied ex-post facto.

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Some business models are better than others

I started my entrepreneurial journey almost 4.5 years back. Over this period I have thought a lot about business, business models, how to create wealth etc. I was in Mumbai a year ago and a young relative asked an older uncle (who was a senior executive at a large bank) about “what kind of business should I do?”. Now obviously, the way to decide which business you’d like to do depends totally on you, your experiences, your circle of influence, what you love, what excites you, how you feel about a certain problem etc. However, my daily business routine makes me clearly see that some business are better than others. It’s like this awesome post by Bill Gurley called “All Revenue is not created equal” – if you haven’t read it, do read it. Just like revenue, some businesses are inherently better than others.

Here are my thoughts (I’m guessing a lot of other people have had the same thoughts, but I haven’t really checked on this much):

1. Everything else being equal, subscriptions revenue > transactional revenue > advertising revenue. A lot of businesses have a mix of the 2 out of 3 or all 3 forms of revenue. Sometimes it is tricky figuring out what kind of revenue it is e.g. Gillette looks like transactional (when I buy the safety) but it is actually fundamentally a subscription revenue (purchase of razors every month). I think all businesses strive to move to the subscription category because of better predictability of revenue, one time effort of selling and mostly additive revenue. In India, consumers are not used to subscription businesses apart from utilities (electricity, telecom etc.). In the US, you can build a business using B2C subscriptions business a bit more easily, even though it would be tough (Ladder, LinkedIn, ConsumerReports – which does $200m annual revenue).

2. Everything else being equal, for the first time entrepreneur (aspiring to create a large business) without connections/pedigree, here is how it would work best:

Product > Service. Unregulated > regulated. B2B > B2C.

If, however, you have lots of capital and you are well connected, here is how it would look:

Product > Service. Regulated > unregulated. B2C > B2B.

By regulated I mean that there is some kind of an entry barrier which favours the incumbents (like telecom spectrum, banking licenses etc.).

By product v. service, do read this Understanding product v. service – ThinkLab Notes 1. It is sometimes tricky to decide which is what (e.g. broadband is a product, even though it is sold as a service), but typically you have a good sense when you come across something which is a service.

The worst place to be (usually) is B2C + service + unregulated.

That said, there are tons of large successful companies in each of these different zones.

Different business models

Different business models

From a first generation entrepreneur’s viewpoint, it is best to look at B2B, product, unregulated markets.

3. On the internet, the strongest businesses are the marketplaces (usually difficult to pull off in the offline world). In fact, in addition to delivering software as a service, the only other fundamental use of internet from a business perspective is to build a marketplace / network. Marketplaces/networks are horribly difficult to get off the ground (especially in India where VCs are not comfortable with taking a bet to keep building one side of the pipe – usually B2C – without seeing the monetisation on the B2B side of the pipe). But if you are considering doing a consumer internet company, building a marketplace model is a great way to build a good business.

4. The other prism to look at things is to see: capital required, time required, success rate, scale of success. Typically, some business categories (B2C, service, unregulated) would take a lot more capital, get built over a few years, have a high failure rate, but have a huge scale of success if they do succeed (e.g. Amazon, Flipkart). One of the other hand, doing a B2B, service, unregulated like starting an ad agency, or a corporate law firm can require little capital, take a lot of time, have a decent success rate but the scale of success is not huge.

In summary, while an entrepreneur might choose to solve a problem he/she is passionate about, the above factors play a huge role in how and where the company is likely to end up in.

Note: Like all models, this is just a simplification for how our complex world works. I find the above mental model quite useful because it helps me understand why some businesses are really sexy while others are not. To be honest, most of the stuff is quite obvious – but one is still tempted to try and put down one’s thoughts.

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Life’s wish – make a film like Monsoon Wedding

I first saw Monsoon Wedding in 2001 in the Piccadilly cinema hall in Sector 34 Chandigarh in 2001. It received a standing ovation by the mostly Punjabi crowd. Over the last 12 years, I’ve watched it once every couple of years – each time mesmerised by the characters, the cinematography, the dialogue and the sheer courage of dealing with a taboo subject in a film like this. If I ever make a film, this is what I would aspire towards.

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The arrogance towards self-help books

People who read self help books generally don’t like talking about it. Considering how many people could improve their daily lives by changing themselves, it is a bit strange.

The first time I heard someone talk openly about self-help books was Kishore Biyani – at TiE Mumbai in 2010.

Someone in the audience asked him:

“Sir, how were you able to take so many risks?”

“I keep training my mind. If a normal human being has 10 thoughts, usually 6-8 thoughts are negative. I have trained my mind to have 7 positive thoughts out of 10.”

“How did you do that?”

“I read Anthony Robbins’ book The Power Within which talks about using neuro-linguistic programming to train you mind to think positive thoughts. I would recommend the book to all of you”.

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A few years earlier, in the final year at NLS, a senior, self-made lawyer came to speak with us and he, without any self-consciousness, advocated reading a lot of self-help books. It produced cringes among all my classmates. I remembered this because it seemed like to me that I was the only one who could relate to him.

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When I was in 11th class, I came across an old copy of Civil Services Chronicle. It was a competition preparation magazine and used to have ads by a dude called “Raj Bapna” who used to sell books on “How to read faster”. I got the book, and found it quite useless. But inside the book I found an excerpt of a letter that Aditya Vikram Birla wrote home when he was in the US. The letter had been excerpted from a book called “Business Maharajas”. It intrigued me and I got the book. Now, this book was something else – it opened my eyes to the world of business. Starting with story of Ambani, it covered other people like Ratan Tata, Aditya Vikram Birla, Bharat Shah (before he was arrested, he was a legit story), Khaitan, and RP Goenka. If I hadn’t brought the Raj Bapna crap, I would have never read that book.

The other books, which I have found useful over the years, are the ones by Dale Carnegie and Steven Covey. They force you to introspect – which is generally quite difficult to do unless you are forced.

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