In July, Lenskart’s founder and CEO Peyush Bansal took out a loan to buy 17 million shares of his own company to shore up his ownership by a percentage point at a private valuation of Rs 8700 crore. Three months later, he asked the public markets to value the same company at 8 times that in its IPO. Such an ambitious leap bit the “shark” from the reality TV game show really hard: The eyewear retailer listed at 12% discount to its offer price, ending the day flat.

Around the same time, across the Atlantic, another mercurial maverick Elon Musk sought shareholder approval for a new, milestone linked $1 trillion stock compensation package after steering Tesla’s market value to $1.4 tn — more than all other western carmakers combined.

The size, scope and scale of the two stock compensation packages of Musk and Bansal may not be comparable, but what binds the two founders is their attempt to seek out more skin in the game. It triggered a tumultuous chain of events polarising small shareholders to large institutional investors, proxy firms, pension funds to peers, venture capitalists and cheerleaders and even the pope.

Awarding stocks to founders comes with a moral hazard, both for the financial investors as well as the founder. Any uncertainty around equity ownership in a young company’s cap table makes the financial investors, typically VC/PE investors, more vulnerable to succumb to pressures from founders to heed to their requests for “top-ups” to continue to run their business. If shareholding structures keep changing based on formulas or performance milestones, it implies ownership is fungible thus tilting the power dynamics towards the one at the steering wheel. Scope of extracting more and more from minority shareholders compounds perpetually. Precisely why SEBI bars promoters to self-reward themselves through ESOPs.

There is a long-term moral hazard for the founders as well. The fear of equity dilution tends to keep companies and founders disciplined about capital allocation. If it comes cost free, it’s impossible to acknowledge the true value of equity. Without suffering the pain of ownership erosion, nothing stops a founder from an unwarranted fundraising spree, often a prelude to serious business missteps.

That said, often 1st generation entrepreneurs with limited resources, do get diluted to low single digits pretty early on in their corporate evolution. VC firms usually get first option on the smartest disruptors and the best deals, collectively raking up a much higher holding. There is indeed a real case in incentivising such founders to continue to add value to their enterprise through incremental management ESOPs (MSOPs). But it has to be transparent: Clear medium-and long-term performance linked milestones that are pre-agreed upon, adequately disclosed and vetted by an independent board to avoid the perception of short-term greed.

Bansal became the eye of the storm because he is MD and founder CEO as well as the single largest shareholder of Lenskart. He and his family members are selling the maximum number of shares through a secondary sale of shares (OFS) making them the biggest beneficiary of its IPO. Founders of many young consumer internet companies have been bringing down the OFS component in more recent listings following heightened investor rancour over post listing price meltdowns. Lenskart chose to buck the trend.

Bulk of the money is being raised by the investors themselves through share sales and not the company as growth capital. Bansal’s shareholding has also seen a notable jump as he has been buying shares directly from his financial investors by subscribing to convertible share instruments (CCPS).

Peers in Eternal (Zomato), PB Fintech Swiggy, Delhivery in contrast have all leaned on employee ESOP pools issued for all employees including founders. The risky bet involving a personal leverage to buy the last tranche of shares was little too close to the listing. The share sale at arguably a far lower price than fair market value/price (FMP) made the structure unnecessarily convoluted and distracted everyone from the main purpose which in itself was perhaps not mala fide. Commentators pounced on Bansal, a judge known for scrutinising even the smallest financial details on television, screaming misgovernance.

There are far more elegant ways to go about it. Simplest is through a rights issue at face value of the company. Only the founder participates for his pro-rata shares while other shareholders do not and get diluted in the process. But it runs the risk of a tax incidence on the founder.

Alternatively, the company can also issue ESOPs to a founder at face value for performance and the delta between the issue price and the fair market value/price (FMP) gets debited from the company’s P&L. The adjustment in the EBITDA also needs to be communicated to shareholders. When the shares are exercised, the founder pays the (income) tax. This is equally kosher as against a share sale at a low price which one can argue is clearly below the FMP.

Our laws and regulatory framework also needs to catch up. Compensating founders with low ownerships fairly is as just as important as being transparent about it. They are taking the risk of running the business but equally run the real risk of losing control due to a hostile takeover. The “Mindtree risk” is for all to see and remember. Such risk taking should also be encouraged by the tax man and facilitate a regime that taxes ESOPs to founders and KMPs as income and not capital gains This cohort needs a clear mark out.

For Silicon Valley this has been a legacy issue but dealt with smartly. In the west it is less about the money, more about control. When Larry Page and Sergey Brin took Google public in 2004, six years after founding the tech giant, it had two classes of stock with differential voting rights. Class A stocks had one vote per share, and Class B stock, had 10/ share. The duo each had about 16% of the Class B stock, giving each of them about 15.8% of the voting power of the company. Over time investors including the two, swapped shares, bought, sold so that a decade later they each had about 39% of the Class B stock and about 28% of the voting power. What Google gave its founders may not have had an obvious dollar value but allowed them the ability to control the company forever, even as it kept issuing more stock. This kept them motivated.

Similarly, Facebook’s dual-class share structure was created by the company itself before its 2012 IPO to ensure founder Mark Zuckerberg retained majority voting control. Tesla didn’t and drove straight into the 12-month long turbulence for the EV maker cum space pioneer cum AI powerhouse cum robotics upstart and its hyperbolic chief executive. The nuances of our young startups are different. It would be wiser to revisit our regulation of one share = one vote model.

By facilitating a generation of founders with low ownership to successfully manage, run and subsequently list their companies, we would be creating a pipeline of high quality, board managed professionally run businesses that will truly broaden the spirit of enterprise in India and enhance shareholder value. Trailblazers like Musk or even Bansal certainly need a prize to stay invested. But they should be smart about it and not too sharp.