Razorpay's Shashank Kumar: Reward High Performers With More Equity
Shashank Kumar, co-founder and managing director of Razorpay, talks to Deepsekhar Choudhury and Tarunya Sanjay about how Esops are key to fast-growing start-ups. Edited excerpts
When did you first start thinking about employee stock options (Esops)?
We started thinking about Esops from the very beginning. When the first and second employees joined, we already wanted to offer Esops. These early hires were taking significant risks by joining a start-up and often accepting salary cuts.
The biggest challenge was that employees didn’t really appreciate Esops in the early years. I’m talking about 2015, 2016 and 2017. Most people preferred more cash over equity because they didn’t see Esops as having real value.
Despite that, we stayed firm in our belief that we wanted people who genuinely believed in the company and its long-term growth. We wanted employees who were aligned with the idea that if the company succeeds in the long run, they would benefit alongside it. As a result, we mostly hired people who believed in Esops. In some cases, we even pushed for higher Esop allocations instead of negotiating on cash compensation.
How should an early-stage start-up founder today think about Esops?
It really depends on the stage of the company. If you’re running a start-up that is unfunded or has only raised a small seed round, it’s simply not possible to match the salary of someone coming from a large tech company. In such cases, anyone joining the start-up should expect a significant salary cut, and in return, they deserve a meaningful Esop allocation.
On the other hand, when a company is more mature, say at Series B, C or D [funding stage], the approach becomes more structured and calculated. At that stage, you can often offer a salary closer to market rates, perhaps with a small cut of around 10%, and then compensate for the remaining risk through Esops.
When did you start thinking about Esop liquidity?
We started thinking about Esop liquidity after some time had passed and the company had reached a stage where it felt right to consider giving employees liquidity. It was not something we thought about immediately, but once we felt we were at a stable point.
The company’s first Esop buyback in 2018 allowed 140 employees to liquidate their vested shares and a larger $75mn buyback in 2022 benefited 650 current and former employees. At least at that point, the thought process was very simple. We wanted to show people that Esops actually had real value. The intent was not to encourage anyone to sell, because we strongly believed that the company would continue to grow significantly from there.
Investors have begun to better understand the role Esops play in rewarding talent in a highly competitive market
Was there any thumb rule around maintaining a certain Esop pool size?
At any point in time, we have always maintained an Esop pool of a little over 3%. Some companies choose to keep it at around 5% as well. But I think the exact number is not that important, because whenever the pool gets exhausted, we refresh it.
How has the Esop pool helped with employee retention?
I think it has played a very important role. It has also generated a lot of positive sentiment among employees whose Esops grew over time and who benefited meaningfully as the company scaled. In Razorpay, 83% of employees hold Esops.
Another important aspect is that for employees who are performing really well, particularly the top 20–30% of the team, you can give far more stock options than you can give incremental cash. You cannot always keep increasing cash compensation, but you can reward high performers with more equity.
Many new age companies have gone public with large Esop pools and faced criticism that Esops weighs on profitability. As a company planning for an IPO, is this something you have thought?
Yes, I think granting Esops itself is still a relatively new phenomenon in the industry. That is one reason it has felt unfamiliar or uncomfortable for parts of the public market when tech companies have gone public. Investors sometimes question why technology companies have very different Esop structures compared to traditional or old-school industries.
I think it has taken some time for the market to adjust to this new reality and to understand how technology companies use Esops. Over time, those questions have largely been answered. As companies have matured, concerns around profitability have reduced. At the same time, investors have also begun to better understand the role Esops play in retaining and rewarding talent in a highly competitive market. Esops are simply a reality of building and running a new age business.
Founders get diluted as multiple funding rounds happen, and some investors feel that founders should have skin in the game through Esops.
For me, it is quite simple. Founder stock options also vest over a period of four years. At every funding round, founders can receive some Esops. I think of it in a very similar way to hiring a CEO to run the company. At a late stage, the company is professionally managed, even if the founder continues to be the CEO or part of the leadership team.
In that sense, it should be treated like a market decision. If you were hiring a CEO from outside, what Esop grant would you give them to incentivise them to do the best possible job for the company? That same logic should apply to Esop grants for founders as well as for the broader management team.