Decoding Liquidity Programs for Private Markets with Skanda Jayaraman, CEO of Qapita Marketplace

Welcome to this special edition of Fables Of ESOP. Through this newsletter, we have constantly updated you of all the ESOP happenings in India and SEA. In 2021 alone, over 40 companies announced ESOP Buyback to the tune of about $450 million.

However, have you ever wondered about these questions:

• How these liquidity programs are executed?
• What is a buyback program and what is bought back?
• What is a secondary sale?
• How are liquidity programs financed by companies?

In this edition we seek to deconstruct the basics of liquidity programs for you. For example:

Did you know that most of these ESOP Buyback programs conducted by startups were infact technically not a ‘buyback’?

To demystify this and many more aspects of Liquidity Programs, I spoke to Skanda Jayaraman, the CEO of Qapita Marketplace. Skanda is a seasoned Investment Banker in the startup world for over 2 decades with his last stint as the head of Spark Investment Banking which he grew into one of the leading Investment Banks in the startup space.

It was a free-wheeling discussion with Skanda as he helped deconstruct all aspects related to liquidity programs right from the technical aspects of executing a liquidity program to when should a founders consider offering liquidity and the latest trends he is seeing in the market. Let’s dive-in to the details.

Here is the link to the full video.

What is Stakeholder and ESOP Liquidity and why is it important?

First up, Skanda spoke about the importance of employee and stakeholder liquidity and why it is important especially for private companies. Skanda explained that earlier the only ways in which private companies offered liquidity to their employees and stakeholders was by going public or through an acquisition event.

However, startups are choosing to remaining private for a longer period of time currently and yet there is a demand from stakeholders to get liquidity for their ESOPs and shares. From companies standpoint, startups are competing for the same talent that is also joining the tech giants such as Microsoft, Google, Amazon etc. which offers anytime liquidity as these companies are liquidity. hence it is extremely important for founders, board and CFOs of companies to consider offering liquidity at regular intervals to attract and retain the best talent.

When should one consider offering Liquidity to employees and shareholders?

On this, Skanda opined there cannot be a one size fits all answer to the timing question. It depends on the stage of the company’s evolution and the sector the company operates in. In earlier days, IPO was the only route. However founders can now consider doing a liquidity program event at a Series B stage and beyond. Many companies that announced a large funding round recently have also considered offering a liquidity program. However companies need not wait for a funding round to offer liquidity anymore. They can offer structured and frequent liquidity events say every 6 months or 9 months thus offering liquidity opportunities across the lifecycle.

What are the different approaches to running a liquidity program and how are they financed?

Skanda spoke of three broad ways in which liquidity program can be executed and financed.

1. ESOP Surrender: The first is an ESOP Buyback, where the company uses the cash on its balance sheet to cancel the ESOPs that are surrendered by employees and pay out the value as an addition income to the employee just like a bonus. It is taxed as per normal income tax rates
2. Share Buyback: In this case, the employees and stakeholders having shares of the company can participate in the buyback event where in the company buys back the shares at the value decided and transfers cash to the employee. In this case, capital gains is applicable as per the standard rates. This method also involves company’s own cash reserves.
3. Secondary Sale: In this case, a third party buyer buys share from a shareholder and transfers the consideration to the stakeholder. Here, the company’s cash is not utilised and the transaction doesn’t hit the company’s books. In this case too, the selling stakeholder needs to pay capital gains on the value appreciation.

What’s the process of conducting a Liquidity Program?

Next up, we asked Skanda the process of conducting a liquidity program and he explained why it practically takes a few weeks to execute a liquidity event for a private company. By nature of the company remaining private, it means that the shares are not transferrable freely in the market and any transaction needs to be in compliance with the Company Laws, FEMA laws as applicable and in accordance with the board and investor rights such as ROFO/ROFR etc. And hence, closing these transactions manually step by step anywhere between 6 to 8 weeks. Qapita seeks to automate the entire workflow and helps companies complete liquidity programs in a matter of a few days.

What are the recent trends you are seeing with regard to ESOP Liquidity?

Skanda pointed out some very interesting points with regard to ESOPs in general and liquidity trends. He mentioned that there is a fundamental shift in the way employees are looking at their jobs these days. They are increasingly seeking more skin-in-the-game (SITG) and demanding a share of ownership in the companies they work for to feel more associated. Further, once ESOPs are given, they also demand liquidity at regular intervals. All these trends in a way validates the need for structured liquidity programs.

What is the investor mood from the supply side?

Here Skanda highlighted that there are two aspects one needs to look at: the structural elements of India and SEA as large market opportunities as well as the cyclical factors that are impacting the short term sentiment. He mentioned that the cyclical factors causing the current downturn might prevail for the next couple of quarters, however the structural strength of India and SEA as strong market opportunities is well established as validated by huge pool of fresh capital raised by most of the global venture capital funds dedicated for India.

How does Qapita Marketplace seek to transform private markets?

Lastly we asked Skanda about what’s brewing within Qapita Marketplace and how do they seek to streamline liquidity in private markets. He used a nice analogy that Qapita is seeking to build for this broken private market infrastructure and smoothen the deal process and timeline for liquidity programs to make it easy for various categories of investors to participate in private markets and invest in secondary and buyback opportunities in startups. Further, Qapita also seeks to offer custodial services to help companies consolidate their shareholders on captable. Qapita also offers Structured Liquidity Programs for startups to offer liquidity at regular intervals.

So that was a comprehensive discussion with Skanda on all things liquidity as far as private markets are concerned. We hope you found the discussion informative and you were able to get your open questions answered.

If you are looking to plan a liquidity program in your company or if you have any further questions on how liquidity programs work, do reach out to us using the coordinates below.

You can email to: info@qapitacorp.com or srikanth@qapitacorp.com

Connected with me: LinkedIn; Twitter.

Stay tuned to Fables Of ESOP.

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