Forthcoming listings of Grab, GoTo could make ESOPs more common in SE Asia

Photo: Scott Graham / Unsplash.com

Employee Stock Option Plans (ESOPs), where workers are allotted a certain stake in their companies by employers, could see a spike in popularity in Southeast Asia, driven by the upcoming mega listings of regional unicorns, as well as the competition for tech talent.

“Startups are increasingly becoming more generous in doling out equity shares, especially among the technical leadership team, because they know that it’s difficult to get a good head of engineering or a CTO [chief technology officer],” said Elena Chow, founder of talent solutions company ConnectOne.

Chow added that CTOs at even early growth-stage startups are being offered 1-5% of the ESOP pool.

The talent crunch in Southeast Asia is exacerbated by the expansion of deep-pocketed US and Chinese giants in the region. This may compel companies to incentivise employees by adding ESOPs in their compensation packages, industry observers say.

“A lot of [jobseekers], especially the fresh- and mid-level engineers, will flock to bigger brand names,” Kian Chong Chan, a recruitment specialist at jobs portal NodeFlair had told DealStreetAsia in a recent interview. “The bigger players offer quite extravagant salaries.”

For the small players, offering ESOPs instead of fat salaries may be a more viable option.

At the same time, all eyes are on the forthcoming public listings of tech giants Grab and GoTo. If successful, the listings could bring big gains to those employees who were allotted equity shares in the companies.

This, in turn, could add to the overall allure of ESOP plans in the market and many job seekers may be willing to accept ESOPs in their compensation packages.

Under ESOP plans, shares are allocated to eligible employees every year, giving them an increasing ownership stake as they gain seniority.

Employees can exercise their options after a minimum vesting period of typically 3-4 years by paying a strike price for the shares. The strike price for the options is usually set at a discount to, or at par with, the valuation of the company.

The employees make a profit if, at the time of exercising the options, the strike price is below the market value of the shares. This typically happens when there is a liquidity event.

“While many employees value cash compensation more than ESOPs, it’s undeniable that ESOPs can benefit long-term employees the most as it has the potential to offer a huge payday,” Piruze Sabuncu, partner at Square Peg Capital told DealStreetAsia.

Demand in the secondary market

Data from Singapore-based private investment firm Fundnel suggests that there is demand for unlisted startup shares in the secondary market.

In 2020, Fundnel saw a ten-fold increase in interest to sell startup shares. This included startup employees looking to cash out their ESOP shares.

On average, overall ESOP pools are at 5-15% of the cap table, said Fundnel’s head of investments Muzahir Degani. Early-stage companies will be at the higher end, while later-stage companies will be at the lower end, he added.

Degani also observes the share of ESOPs in the cap table increasing. “There’s a lot more money carved out, a lot more fundraising, use of proceeds being set aside for the ESOPs,” he said

This is the case at Singapore-based cross-border payments firm Nium, a Temasek-backed company. Co-founder and CEO Prajit Nanu had declared that they are setting aside 25% — an industry high — of their overall cap table for ESOPs.

Credit: Prajit Nanu’s Twitter account

Early days for ESOPs in Asia

Unlike in the US, where ESOPs originated in the late 1950s, the scheme is still in its nascency in Southeast Asia.

ESOPs are widely adopted by US tech giants including Facebook and Apple. It is, by far, the most common form of employee ownership in the US.

Forbes reported in 2012 that employees of US-based tech giant Apple who had contributed the maximum to Apple’s ESOP over seven years saw the combined value of their shares grow to $1.6 million. In the same year, the Financial Times estimated that the first employees of Facebook — 3,000 odd of them — stood to collect $23 billion worth of gains from ESOPs.

In contrast, Asian companies have not been so forthcoming with ESOP plans. According to data from US-based valuation software Carta, employee ownership in a company in Asia is over 40% lower than in the US.

“The US has a decade or so head start on most of the world as it relates to the maturity of the venture ecosystem,” explained Cody Anderson, who spearheads corporate expansion for Carta in Southeast Asia.

Further, preference for cash payments among employees contributed to the low proportion of employee ownership in Southeast Asian firms, a recent joint survey by VC firm Monk’s Hill Ventures and human talent recruitment platform Glints revealed.

Companies should avoid a one-size-fits-all approach to ESOPs, and instead consider that employees have different financial goals and priorities.

For example, when companies are hiring senior-level talent, they have to consider that these employees could be starting or having their own families and therefore have additional considerations such as income stability. Junior employees, on the other hand, maybe less averse to risk. “Sometimes, it depends on where the person is, on the ‘Maslow’s Hierarchy of Needs’, rather than just age,” explains ConnectOne’s Chow.

Even as the ESOPs evolve, the ball has started rolling.

Fundnel is already seeing a lot more Indonesian companies doing ESOPs, said co-founder and CEO Kelvin Lee.

Carta, meanwhile, expects to see an increased uptake for its CartaX private-share exchange service. “More mature/pre-IPO companies [in Southeast Asia] would be open to running regularly scheduled secondaries for existing employees and investors — for example, quarterly, semi-annually, etc.” said Anderson.

“The employees of companies such as PropertyGuru, and Grab will benefit financially from their company’s success. This latest wave of success stories will drive a big take up in ESOPs in Southeast Asia among high-growth startups,” added Square Peg Capital’s Sabuncu.

Challenges

Even as they stand to become more common, ESOPs have a few downsides.

Figuring out the right strike price is challenging for the company, as ESOP shares are usually offered at a discount, or at par, to the valuation of the company in a specific round.

ESOPs usually contain a vesting period — that is, the shares will have to be held for a minimum number of years — before employees can sell them. This means they must work for the employer for a certain number of years before they can take some (or all) of their ESOP shares with them.

Also, new joiners may not qualify for ESOPs although companies make exceptions for senior-level staff.

Companies that implement ESOP plans can also incur high administration costs, something that cash-strapped startups may be unwilling to consider. However, that can soon change as ESOP software management companies like Carta make these more accessible.

“These days, ESOPs are no longer just informal talks but have to be properly structured, just like cash compensation in a corporate company,” said Chow.

Kristie Neo contributed to this story.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.