Why are we valuing ourselves at just $2 Billion

27 Nov 2021

The only reason why we do a valuation exercise at Zerodha every year is for our ESOP buyback. I keep getting asked why are we valuing ourselves at just $2Billion currently when smaller players are raising money at far higher valuations. Here is why we’re conservative.

Some background: We don’t promise ESOPs for anyone on our team. Frankly, we never thought we were building something that could become so valuable. So we never thought of ESOPs. But around 2017 when the business started growing, we created an ESOP scheme to share the success.

People who complete 1-year Zerodha get ESOPs. This is to be sure if they are with us for the right reasons. We tell everyone to think of the ESOP scheme as their retirement fund which will compound over the long term if we do well working together as a business.

All ESOPs come with 0 strike price (no cost) and top of the liquidity preference. Every year new ESOPs issued are > ESOPs bought back. ESOP buyback is optional. We also have a loan scheme where our team can take loans at around bank FD rates against the vested ESOPs.

Our ESOP buyback is from the profits we carve out & not through external fundraising. This is so that everyone can focus on profitability which improves the odds of us being sustainable & resilient in the long run. The ESOPs will then truly be a retirement fund for everyone.

I’ve been in the markets across multiple cycles to know that what happened last 18 months was an outlier. There is no easy money to be made in the markets in the long run. When the going gets tough, greed disappears & with that trading activity & volumes & inflated valuations.

For eg., if the markets were to remain subdued for a few more weeks, activity for all capital market participants will be down by at least 30%. It doesn’t matter even if the product is made in heaven. Our business is cyclical & highly correlated to the markets.

We want ESOPs to be like a low volatility retirement fund because this would probably be a large chunk of the networth for many on the team. Valuation ups & downs can be mentally taxing. Since we have no plans to raise external money, we thought ~15X PAT was a fair value.

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