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After a painfully long waiting period, Flipkart finally managed to score a whopping $1.4 billion in its latest funding round led by blue-chip technology giants Microsoft, eBay and China’s Tencent. It also acquired eBay’s India operations to further its presence and reach to international markets. But, the homegrown e-commerce giant had to compromise on the valuation to make this fundraising round happen in the first place.

As announced earlier last week, Flipkart picked up fresh funds at a valuation of $11.6 billion. This is significantly lower compared to the company’s value of over $15 billion in the previous round of funding in June 2015. But, if you take into account the huge number of theoretical on-paper valuation markdown by multiple investment banks in the period between the two funding rounds then you’d find a massive gap. Its valuation spiraled down to as low as somewhere in the ballpark of $5.5 billion, which is one-third the previous value.

Thus, Flipkart now plans to issue additional shares to compensate for the down-round (i.e the valuation cut) in its recent investment round. In an internal email sent to all employees, the company has conveyed the messages that it will issue differential stock options to all eligible employees under its employee stock option plan (ESOP). This will enable employees, who were previously lured by such stock options, to protect the value of themselves from the recent reduction in share prices.

In the internal email sent to employees, Group CEO Binny Bansal said,

As an organisation, Flipkart takes immense pride in being the employer of choice for thousands of professionals — a vaulted status that only comes with a deep, company-wide sense of transparency and fairness. If Flipkart does well, so should you.

Further, according to the details communicated via the internal email, Flipkart is providing differential grants to an employee so that the top dollar value (according to the previous $15 valuation) of their options remains unchanged. These stocks will be issued to every Flipkart Group employee — be they’re from Flipkart-owned fashion portals Jabong and Myntra or digital payments service PhonePe.

This is the best course of action for employees, as well as founders, with common stock option plans as the value of their shares is not protected by valuation drops. The investors, on the other hand, keeps its options open. It has rights such as liquidation preference and anti-dilution rights to protect their stock holdings against depreciations in the valuation of a company they’ve invested in. Thus, the e-tailer has decided to hand over extra shares to a third of its 8,000-member strong workforce.

The process of awarding differential shares has been already begun from today. Flipkart has tagged these grants with a lock-in period of two years along with a vesting schedule (when you may exercise your stock options) has been set at five years from the original date of the grants. As for the number of shares being awarded to each employee, the process has been described in ET as under:

For example, if an employee was allotted 200 ESOP units at an FMV of $142 per stock, the total potential value of Flipkart stock held initially was $28000. After the latest round that has established Flipkart’s FMV at $88 per stock, the employee will receive 123 extra units so that the total value of ESOPs will remain unchanged at $28000.

Employee stock option plans (ESOPs), for those unaware, is a qualified plan designed for employees to invest primarily in the stock of the sponsoring employer. It makes them eligible for various tax benefits, which is necessary when you’re scoring large packages at the fledgling startups in the country. Internet giants in India are presently using stock options to lure experienced and top-level talent to their businesses. And this is true for e-tailers like Flipkart and Amazon, among others, who’re always trying to poach executives from each other.

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