With valuations dipping, 'exit' clause enters Indian startups

Namrata Singh | TNN | Jul 7, 2016, 06.39 AM IST

Higher the risk, better the reward and greater the uncertainty, bigger the insurance. What was earlier limited to foreign startups is now entering new-age ventures in India: Exit clause.

Startup CEO/CXO candidates have begun pitching for specific exit clauses in employment contracts. And employers are responding positively. In a bid to safeguard the interests of such candidates, exit compensation packages are being drafted with great attention to detail. Executive search firms TOI
spoke to said some CEO candidates are even roping in law firms for negotiating contracts with prospective employers.

An HR head from one of the leading startups told TOI that in his career of over a decade, he had encountered only one case where a candidate insisted on specific exit clauses. It's a phenomenon that exists in developed markets and is now said to be taking root in Indian startups, especially when valuations are falling.

Several Indian startups have founder-CEOs, but as the ecosystem evolves, founders appoint professionals to take on critical roles. Jabong, Housing and Housejoy are among the startups who have hired professional CEOs.

Factors such as friction between promoters and CEOs and private equity firms and CEOs have added to the cautiousness of senior executives being roped in for leadership roles in companies operating in high-risk industries.

Suresh Raina, managing partner, Hunt Partners, said the executive search firm has seen candidates seeking counsel from compensation experts and law firms while negotiating employment contracts.

"When a candidate takes over as challenging a role as CEO/CXO, expectations run high. Successful CEOs deliver the results, more importantly in the initial fast-growth phase. It has become common practice they expect to be suitably compensated for their work, either by way of stock and/or a share of the value creation, even if in challenging times they may not deliver the same kind of growth," said Raina.

CEO tenures, too, are reducing with added pressure on performance of new CEOs and senior leadership. "Candidates thus want to ensure they get a fair share of the success and wealth creation in case of an untimely exit," said Raina.

The trend is especially strong in the startup world where the risks are greater. Sunil Goel, MD, GlobalHunt India, said: "Given the risk attached to startups, CEO candidates are putting in exit clauses quantifying what non-cash benefits would be converted to cash in the event that the company terminates the contract with the CEO within a certain timeframe. We have seen a few high-profile exits in the Startup world, either due to differences with promoters or private equity firms."

According to Shatrunjay Krishna, director-rewards, talent & communications practice, Willis Towers Watson, such instances usually take place when some change of control (M&As, etc) is anticipated. For example, in an industry going through consolidation or when a larger company is acquiring a smaller one, the CEO at the smaller company would want to protect his interests and retain critical executives by providing them lucrative severance conditions if the change of control happens. However, at such times, the CEO usually acts on behalf of the management.