Since we launched ‘The State of ESOPs in Southeast Asia’ in mid-December 2021, I have been encouraged by the buzz of conversations on the topic of employee stock options (ESOPs).
I first discovered a strong interest in this topic when we received 60+ survey responses from startup founders, from pre-seed to Series B, within 48 hours of launching the survey in November. To date, more than 300 startups across Southeast Asia have downloaded the report to understand how to make ESOPs work for them.
Having had dozens of conversations with founders, employees and investors on this topic in recent months, I wanted to share some notable takeaways for startup founders who are thinking of designing competitive ESOPs in 2022 in order to attract and retain talent, as well as build culture.
(Thankfully, only one in three founders saw ESOPs as a way to ‘cut cost’– I am of the view that ESOPs are anything but cheap. Unlike cash which is fungible and can be earned through revenue or fundraising, company shares once given cannot be earned back.)
Make it accessible, otherwise, you are better off without
In the recent survey of 134 startups in Southeast Asia, almost half structured ESOPs strike price based on the price per share for the latest fundraising round. Furthermore, another one in two startups gives employees less than six months to exercise their options.
To put this in perspective, let’s take the example of Jane, who joins startup ABC as a senior product manager. Startup ABC offers Jane 0.5 per cent of total company shares in addition to her cash compensation, and structures ESOP prices and exercise duration in an aforementioned manner.
Also Read: SEA tech founders playbook: A to Z of becoming a fundraising legend (Part 1)
Assuming Jane:
- Joins ABC after they have completed seed fundraising at a post-money valuation of US$4 million
- Has vested all her options
- Decides to leave ABC as a good leaver
Jane has six months to cough up US$20,000 to convert her stock options into shares (US$4 million x 0.5 per cent). Failing which, her stock options would be forfeited. In most countries in Southeast Asia (bar Singapore), US$20,000 could amount to almost an entire year’s salary in cash.
Furthermore, the upfront capital required to exercise stock options escalates dramatically with the startup’s stage of funding.
| Stage of Funding | Median post-money Valuation (USD M) | Exercise Price (USD) | |
| Seed | 4 | Assume employee has 0.5 per cent of total company shares | $20,000 |
| Series A | 34 | $170,000 | |
| Series B | 110 | $550,000 |
Source: Median valuation data from PitchBook for Southeast Asia-HQ companies
From this illustration, an employee who joins a Series B startup would need more than half a million dollars to exercise their stock options, a setup that essentially renders ESOPs prohibitive.
As more employees start to learn about ESOPs and conversations increase, startup founders can no longer play the information asymmetry game and shortchange employees. Once found out, the startup risks irreversible damage to its employer brand, and loses competitiveness in the war for talent.
Invest in educating employees on ESOPs
To avoid situations where employees feel shortchanged on ESOPs, it is then the role of founders to invest in educating employees. We start to see promising signs that founders in Southeast Asia have stepped up to this role. More than 9 out of 10 leaders make the effort to explain ESOPs to their prospective hires, mostly before they start work.
Also Read: How does startup dilution for founders work with ESOPs and investment?
To build on these positive intentions, here’s a non-exhaustive checklist founders can work through together with employees to ensure they have a sufficient understanding of ESOPs:
- Why are ESOPs valuable to me, as an employee of the company?
- What are cliff and vesting, and what are the cliff and vesting periods applicable?
- What is the strike price and what is the strike price applicable?
- What is the exercise period and what is the exercise period applicable?
- Are there good leaver / bad leaver provisions? In what situations will my vested options be forfeit?
- What happens when there is a liquidity event? Do I get accelerated vesting?
- In what priority will I receive the distributions from a liquidity event (e.g. my company’s investors will get distributions first, then the remainder will be allocated between founders and myself)?
- Are there any restrictions on my ESOPs?
- Who can I ask about ESOPs if I have further questions?
Step outside to understand local nuances
While the vast majority of startups we surveyed operate in more than one country, almost 4 out of 5 had headquarters incorporated in Singapore. Unsurprisingly, Singapore presents itself as a highly favourable destination for ESOPs, with clear legislation and taxation guidelines.
Juxtaposed against the often-murky and non-straightforward legislations and tax guidelines, ESOPs outside of Singapore are comparatively more complicated. Employees in these jurisdictions are often employed under local subsidiaries, where the issuance of ESOPs in relation to the parent company needs to be established. A case in point was the recent reporting on how Grab employees in Vietnam had to liquidate their ESOPs prior to their SPAC listing due to local laws.
Founders may be well-served to develop a nuanced understanding of ESOPs across key markets, especially those outside of Singapore. A two-pronged approach of firstly, speaking to trusted investors and fellow founders for firsthand learnings, followed by verification with legal and tax counsel, can help sidestep costly ESOP pitfalls.
Know your competition well
With growing awareness and conversations around ESOPs among both founders and employees, it is critical to know what competition looks like.
In The State of ESOPs in Southeast Asia report, we shared the ESOP ranges offered to leadership, senior and junior employees. In the follow-up conversations, we learnt there was a deeper desire for founders to have a more granular understanding of how ESOP varied across maturity– after all, a Series B startup may be better placed to offer higher cash compensation than one without any external funding, hence compelling the latter to offer more ESOPs at the same seniority.
As such, we have segmented the ESOPs offered to employees across both roles and stages of funding. As ESOPs are most often associated, set up or topped up during new rounds of fundraising, we think this can be a handy guide for founders to understand what the landscape looks like.
Also Read: SEA tech founders playbook: A to Z of becoming a fundraising legend (Part 2)
Dare to differentiate, and share about it
While our report laid out the state of ESOPs in Southeast Asia as-is, founders should not be afraid to deviate from the ESOP canon and dare to create differentiation to stand out in the competitive landscape today.
An advantage can be as simple as establishing monthly vesting structures (only one in three startups do so today, with the others vesting less frequently), or even a change in the typical cliff + vesting period.
Also Read: 12 legal considerations when drafting your ESOP
While the norm is for a 12-month cliff followed by a 36-month vesting period (adding up to 48 months), an increasing number of startups have decisively shortened this period and even removed the cliff altogether.
Hence, founders must not be afraid to lay out these differentiators and proactively share about it throughout the recruitment process, not leave it in an ESOP policy that is mostly unread.
ESOPs can be the lethal weapon in a startup’s arsenal to win the war for talent. Thoughtful structuring of employee stock options can not only move the conversation away from a negotiation of the numbers (cash, bonus, basis points) to a more holistic, thoughtful conversation but also be an organic promotion channel for prospective employees. Ultimately, the goal is to align the risks and rewards between founders and employees – and a well-crafted ESOPs plan might just be able to do that.
The production effort for the report was supported by Svested, RDF Strategies and BYRD Creative.
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