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The redBus sale: A cautionary tale

How the sale of the successful bus ticketing start-up to Ibibo created a rift among its co-
founders, senior executives and staff

Read more at: http://www.livemint.com/Companies/tBeYdNTIP6rXT7c7d5qLSJ/The-
redBus-sale-A-cautionary-tale.html?utm_source=copy


The redBus; a bus ticketing company, which was founded in 2005, was acquired by Ibibo in
2013. If you are the founder of a start-up or work in a start-up, then this story is for you. If
you hope to ever go down that path, keep reading. Because what happened at redBusyes,
redBus, the whale of a start-up success story of the last few yearscould happen to you. To
your company. To your people. And if and when that happens, then you need to know what
to do. Or what not to.

This cautionary tale, pieced together from interviews with multiple executives at redBus,
investors and other people familiar with the matter, many of whom didnt want to be named,
begins in June 2013 when the bus ticketing website was acquired by the Ibibo Group, a
subsidiary of South Africa-based media firm Naspers Ltd, for $135 million.

Back then, it was a big deal, a celebrated story. It still is. Except that within weeks after
signing on the dotted line, the co-founder of redBus, Phanindra Sama, found himself in a
rather humiliating situation. It all started when he was feeling on top of the world, when he
was on a holiday in London with his parents whod never been abroad before. And since he
wasnt hoping to do any work, Sama didnt care to get a local SIM card. So there was no one
bothering him with calls or emails. That is till he landed in Bangalore. And switched on his
cell phone. In the 10 days he had been away, all hell had broken loose.

Alok Goel, the companys chief operating officer (COO), had put in his papers. So had Satish
Gidugu, the companys chief technology officer. Goel wasnt the only one who had resigned;
three mid-level managers had, too. At the companys headquarters in Bangalore, the scene
was one of total chaos, of anxiety and anger towards Sama, and Ibibo taking over.

It had been just a few weeks, but employees were already feeling the team from Ibibo
breathing down their necks. This was in complete contrast to Samas leadership style, which
had been largely hands-off. Work had suffered. Led by their respective team heads,
employees from both the technology and product divisions were mostly huddled in
conference rooms discussing what was happening. Questions were posed: Why did Phani
(as Sama is popularly known) cheat us? How could he do that? How many years have you
worked at redBus? How much did you make from this sale? Do you know how much Sama
and some other people in this company have pocketed? Do you know that in Infosys, even
the car drivers made money?

With Sama not around, the takeover team from Ibibo was foxed. Desperate calls and emails
to him went unanswered. A simple thought was playing on their mind: now that Sama has
sold the company, does he care? He must have seen this coming. For Sama, who has often
been portrayed as the nicest man in the start-up world, someone who could do no wrong, this

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was a fall from grace. Now, back in Bangalore, he couldnt believe what had come to pass.
What had happened was pretty simple.

With the sale of redBus, a few people, three to be exact, had become millionaires. A lot of
people, roughly 600, did not. Except that some of them thought they deserved to. Their
contention boiled down to a simple instrument, peddled ever so often in the start-up world
employee stock ownership plans (ESOPs). Those who had them couldnt fathom why the
money never showed up in their bank account. Those who didnt have ESOPs were asking
why not?

Back in office, Sama was clueless. He couldnt figure if this was the same company, same
colleagues he had left behind before going on his holiday. What he could make out though;
was that Goel had become the leading voice of the dissenting group. That left him baffled.

Throughout the run-up to the transaction, which lasted about two weeks, any disagreements
that Goel and others brought to the table had been addressed satisfactorily. At least thats
what Sama and the Ibibo team felt (more on that later). Goel had even been promoted as
COO just two weeks back.

Emotional line

The team from Ibibo wanted to tread carefully. Their trust in Sama had taken a beating so
they asked him to take a back seat. While Sama could still be present in the meetings, Ashish
Kashyap, CEO of Ibibo in India, would take over the task of managing the crisis. Several
meetings ensued. In them, Sama steered clear of pointing fingers at specific employees and
their motivations. Instead, he adopted a more emotional line: to address something that had
hurt him the mostthe accusation of having cheated anyone.

Listen guys, you all know me, he said in one of the town hall meetings, according to two
people aware of what happened at the meeting. Many of you have been here for so long. Did
you at any time feel this yourself? You leave (aside) cheating you; or you cheating me! Did
we ask you to cheat the bus operator at any time? Or even competition at any time. You all
know how we have run this organization, how we have made decisions. People didnt look
convinced.

Kashyap took over and tried to assure the team that Naspers was a global company and its
policies or the way it would run redBus would be much different from the way in which
Sama had run the start-up. We will give you stock options, benefits and retention pay, he
said. Whatever he (Sama) has done, let us put it behind us. Now, do you have any questions
for Phani? he asked, according to the two people cited above. A girl, sitting right at the end
of the room raised her hand. Phani, I want to know your side of the story, she said. Sama
lost his cool. There is no your side, my side of the story, he snapped. If you have any
objective question, ask. Otherwise this will unnecessarily set off rumours. The room went
absolutely quiet. This was not the Sama employees knew. The nice man who almost never
raised his voice had vanished. But Sama got what he wanted. The audience left the room. No
questions were asked.


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But they left wondering if Sama had really done it. Did he consciously deprive them of their
stock options so that he could pocket all the money? Did he, on purpose, draft the
employment contracts of senior executives like Goel and Gidugu in such a way that they
wouldnt see a dime? Why did the agreement not have an accelerated vesting clause? An
accelerated vesting clause provides for employees to receive some or all of the unvested
shares at the time of an acquisition or an initial public offering (IPO). An ESOP is a benefit
plan intended to encourage employees to acquire shares or ownership in the company.

Start-up employees typically get lower salaries than those at large companies. But they are
attracted to these ventures partly because of the possibility of profiting handsomely through
stock options if theres an acquisition or IPO. For instance, the IPO of IT services provider
Infosys Ltd in 1993 when it was known as Infosys Technologies Ltdresulted in more
than 500 employees becoming millionaires. Things were a bit different at redBus. Only the
22 top executives at the company had ESOPs.

The math behind ESOPs

A company typically reserves anything between 1-15% of its equity for ESOPs. It varies
from company to company, says Mohini Varshneya, assistant vice-president at Corporate
Professionals, a Delhi-based legal and financial advisory firm. So, for public companies, it
can be as low as 1%, but in start-ups, it is usually higher because you want more people to
have ownership in the company.

When redBus was founded in 2005, Sama had allocated 10% of its equity for ESOPs. And
the ground rule for ESOPs is risk. So higher the risk, higher the equity offered. This means
that people who come on board early get more. Those who join later, get less. Between the
time redBus was founded, in 2005, and its acquisition in 2013, the company had already
issued 6% of its ESOP pool. To put this in perspective, imagine a situation where you are
eight years old in the company and 6% is already gone. You are left with 4% and you dont
know how long the companys life cycle is. Lets for a moment assume 30 years. To put it
simply, thats 4% for 22 years.

For an eight-year-old start-up, to have consumed 6% of its ESOP pool is fair, says
Varshneya. She adds that in nine out of 10 cases, companies give ESOPs to people who are
directly linked to the organizations growth. Inevitably these are people at the top, she says.
The lower you go down the corporate ladder, the more it is about cash in hand and not
ESOPs.

In 2013, redBus employed about 600 people. Of this, 250 were call centre executives.
Another 100 were employees in the field dealing with bus operators. About 150 people were
in product, technology and marketing. Of these 150 people, 22 had ESOPs. Thats roughly
15%. Some companies give ESOPs to more employees and some to fewer. Again, theres
nothing unusual about the number.

While the numbers tell a black-and-white story, events turn a shade grey when it comes to the
ESOP agreement offered by Sama to the top management. And more specifically, what
transpired between Sama and the dissenting employees, particularly Goel, in the two weeks
preceding the sale of redBus. To understand this, a bit of history should help.

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Goel joined redBus in late October 2012. In his earlier assignment, he was based in the US
working at Google Inc., where he was the global product management lead for Google
Display Network and was responsible for the relaunch of Googles ad product, AdSense. At
the time of relocating to India, he had another offer from e-commerce retailer, Flipkart, but
chose to go ahead with redBus insteadat a significantly lower salary. He took the pay cut
because of the ESOPs. Plus he was given to believe by Sama and the board that here was a
company that could make him a millionaire, whenever it went public or sold out. Goels
ESOP scheme, like those of the other 21 other redBus executives, was structured in a way
that 10% of an employees options would vest after the first year, which means an employee
is eligible to convert his/her options into redBus shares at a fixed price after spending a year
at the company.

As per the scheme, 20% of an employees options would vest after the second year, 30% after
the third and 40% after the fourth. According to Varshneya, there is nothing odd about this
vesting schedule. Companies want employees to stick on longer, which is why a large chunk
of the payout is the fourth year, she says.

Sometime in early June 2013, eight months into the job, four months before his first vesting
would be complete, Goel got to know that Sama was selling redBus to Ibibo.

The road downhill

Two weeks before the transaction was publicly announced, Sama broke the news to his top
management executives. They were shocked. redBus had been in the market only to raise
funds and some of these executives, including Goel, had made presentations to potential
investors. The thought that redBus would be sold hadnt even occurred to them. People were
not happy. More so when they were told that they wouldnt be making money from the deal.
A lawyers opinion was called for, but they were told that the proposed sale wouldnt trigger
accelerated vesting of their ESOPs. Now, they were really miffed.

It would be fair to say that Ibibos Kashyap and Sama had anticipated this, somewhat.
Kashyap, particularly, was keen on retaining the senior management. But giving them cash
was not an option. They could take it and leave. Instead, he offered salary hikes of at least 50-
60%, stock rewards in Naspers and retention bonuses. The retention bonuses were equal to
the value of the ESOP agreements, only that the payment would not be made as and when the
options vested, but at the end of the financial year in which they vested.

And then there was Goels promotion. Ibibo told Sama that they were looking for a new
COO. Since Sama would have to exit the company at some point within the next two years, a
COO should come in early and pick up the ropes. Sama thought it would be a good idea to
promote Goel. Sure Goel lacked the experience, having worked at the company for only eight
months, but he deserved the chance. The team from Ibibo was not very sure, but Sama
persisted. Goel himself was up for the assignment when Sama reached out to him with a
revised offer. Sama spent the next few weeks trying to push Goels case.

Promoting a person less than a year old in the company would involve a change in reporting
structure and could rile a few who had spent more time at the company. As expected, some

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employees protested. Sama figured a way around this problem would be to meet all the
people individually and try and convince them. But that would need more time. Goel was
getting impatient. Another week passed. A day before leaving for London, Sama announced
Goels promotion, which had been effected weeks earlier, in an email. Less than eight weeks
into the position of COO, Goel resigned. And then, along with Gidugu, he got chatty with a
lot of people to share why he had done it. From there, it was all downhill.

A former senior redBus executive who spoke on condition of anonymity claims the
accelerated vesting clause was very much there in the ESOPs agreement.

Accelerated vesting happens if it is a merger and the new employer does not give any ESOPs
or if the new employer wants you to leave because he feels there is no role for you. But if
the employer is saying, stay, if the employer is giving you his own ESOPs, then there is no
need for accelerated vesting, the executive says. It is not like anything happens and you get
accelerated vesting. People like to believe that if ownership in a company changes, then
accelerated vesting should kick in. You may believe that but it is not true because this is not
what was written in the document, when we signed on the dotted line. It didnt end well, did
it? There were interpretation issues, I said, you said issues (with the ESOPs), says Parag
Dhol, a former board member at redBus and a partner at Inventus Capital Partners. I
wouldnt say the employee grievances were silly or did not deserve a second thought.
Between the parties on the tablethe investors, the buyers and the co-founderwe could
have coordinated and handled the issue better. Its a personal lament. But there was no
violation of the terms of the (ESOP) agreements.

You are required to discuss the case study and list the lessons learnt.


A NICE READ TO PUT THE WHOLE PERSPECTIVE IN THE RIGHT FRAME:

Real PE factor for any firm is people

While investment bankers have inducted 'PE' factor - the price-earnings ratio, which helps
determine the valuation of an enterprise - into contemporary management lexicon, the real PE
factor in the value journey of any enterprise from a leadership perspective continues to be its
'people' factor.

'People' is the only PE factor capable of creating value for itself and unleashing value from
the other factors.

Unleashing the 'low cost: high value' potential of the people factor in these volatile and
challenging market conditions calls for special attention.

Future-smart CEOs- the corporate skippers and proactive leaders who plan and insulate their
enterprise against unpredictable future volatility - will have to evolve and take personal
responsibility for their workforce strategies. They will need to develop a navigational map
that will help them traverse a unique 'value-to-value' journey.

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The HR department-led general people programmes barely succeed in exploiting more than
the surface capabilities of these high-potential resources. Unless the CEO leads from the front
and sponsors generating value from people resources, chances are that the enterprise will
under-utilise these precious resources.

The 'value-to-value' journey encompasses four critical value domains, and is linked to the
CEO's performance contract: create occasions to offer unique value propositions, nurture
critical values to evolve a genuine and flexible culture, energise the system to deliver value to
customers and engage the system with relevant drivers to enhance its 'enterprise value'.

Every organisation needs to have eight capabilities to thrive: a competitive landscape analysis
and market intelligence, demand creation, demand fulfillment, going to market, supply chain,
an order-to-remittances cycle, new product innovation and talent engagement and
development.

Future-smart strategic leaders build their organisation structures around these. They do not go
the classical way of building their structures around power centres in their enterprise.

A firm's reputation is embedded in its capabilities, not in its structure. The value propositions
that make a difference and attract talent to join and stay need to be developed around
experiences and opportunities built around these capabilities and knowledge. Hence, key
success factor No. 1 for the future-smart leader is offering unique value propositions and a
market-competitive total rewards package to 'get' the best talent. However, the greater
challenge is to ensure final delivery of this promise.

Key success factor No. 2 is to build a flexible culture with non-negotiable ethical values
within the enterprise to maximise business opportunities. Future-smart leaders will never shift
their eyes from markets, customer insights and customer realities as defined by market
conditions. The entire system needs to harmonise to deliver 'value-for-money' to customers.

Key success factor No. 3 would be to build a delivery system within the enterprise that gives
customers their desired value for money with an 'aha'. The purpose of business is value
creation.

Key success factor No. 4 is to ensure that focus on short-term profits does not make the
enterprise lose long-term focus on its value creation, and that the people resources are fully
engaged in this.

The volatile markets have covertly indicated their preference. Enterprises that have their
profit earning ratios backed by competent PEople and strong people engagement succeed in
sustaining and realising their long-term projected valuations. Others perish and peter out into
obscurity.

Compiled by CHHAYA SEHGAL