Mumbai’s EdTech Shakeup: Unacademy’s Unsettling ESOP Shift
In early September, a wave of anxiety rippled through Unacademy’s former employees. These individuals received a brief but impactful email announcing a critical change to the company’s employee stock option plan (ESOP). The new policy effectively condensed the timeline for exercising vested options from a generous ten years to a mere thirty days—an adjustment that many ex-employees deemed abrupt and punitive.
For those who have poured numerous hours—and years—into their work at Unacademy, this sudden change felt like a financial time bomb. Exercising ESOPs isn’t without its complications; it requires an upfront payment of the exercise price coupled with immediate tax liabilities, all dictated by Indian law. To make matters worse, former employees found themselves under pressure to make a choice: either invest a significant sum in shares they might not be able to liquidate, or abandon the options they earned through dedication and hard work.
The Backlash: A Social Media Uproar
Discontent erupted on social media platforms, where former employees vocalized their frustrations over what they perceived as an unfair policy. Many expressed concerns that the revamped timeline would trap them into a precarious financial position, where they could be financially liable for taxes on shares that might never yield tangible returns. This collective outcry highlighted an underlying issue that many in the startup ecosystem face: the fear of turning paper wealth into unmanageable tax burdens.
The Tax Trap Behind Employee Equity
At the root of this turmoil is India’s treatment of stock options from a tax standpoint. When employees exercise their ESOPs, the government taxes the discrepancy between the fair market value of the shares and the exercise price as income, irrespective of whether they sell the shares for a profit later or, in some unfortunate cases, at all. Unacademy acknowledged the repercussions this tax liability would have on employees in their communication, emphasizing the potential financial strain posed by a 30-day exercise window.
This taxing dynamic is reigniting a long-standing debate within India’s startup ecosystem—are ESOPs beneficial rewards for employees, or simply tools that shift financial risk onto them during challenging times? Many ex-employees are questioning whether the promises of wealth building through stock options are growing increasingly hollow.
Deal Talks: The Tension of Valuation
Adding to the atmosphere of uncertainty is the timing of Unacademy’s ESOP revisions. Reports indicate that the company is currently navigating potential acquisition talks with UpGrad, aiming for a valuation that significantly contrasts with its peak valuation of $3.4 billion in 2021—now reportedly around ₹2,650 crore (roughly $300 million).
In acquisition scenarios, investor protections, often manifesting as “liquidation preferences,” allow investors to recoup their investment before common shareholders—including employees—see any returns. This can render employee-held shares practically worthless in the context of a sale. By shifting the exercise timeline, Unacademy aims to convert former employees into common equity holders before any acquisition negotiations conclude, potentially preserving some value even if the outcome is unfavorable.
A Disputed Shift and Gaurav Munjal’s Defense
This pushback prompted a rare public exchange on social media between one of Unacademy’s former employees and its founder, Gaurav Munjal. The ex-employee expressed frustration over being compelled to “cough up” substantial sums to either exercise their options or forfeit them altogether, arguing that the shift undermined the startup ecosystem’s credibility.
In his defense, Munjal contended that the core issue wasn’t the shortened exercise period itself but rather the liquidation preference complexities facing employees. He argued that the intent behind the new policy was to enable employees to secure any potential value left, noting that even his own ESOPs were impacted by the change. Subsequent messages saw him apologize for any distress caused while firmly negating allegations about governance and financial disclosures.
The Broader Implications for Startups
This exchange encapsulates a broader tension in India’s startup sector. During periods marked by rapid growth and abundant funding, ESOPs were heralded as a primary method for wealth accumulation among employees. However, as valuations recalibrate and consolidation within the market accelerates, these promises are undergoing painful reassessment.
Unacademy’s journey has seen substantial investment, totaling over $800 million from high-profile backers like SoftBank, Temasek, and General Atlantic. The company’s co-founders, Gaurav Munjal and Roman Saini, have stepped back from daily management, passing the reins to new CEO Sumit Jain.
For both current and former employees, the changes to the ESOP landscape serve as a poignant reminder of the ongoing evolution within the startup sector. Even as the promise of employee ownership offers a tantalizing prospect, the stark reality surrounding turning notional value into actual profits is becoming impossible to ignore.
