Indian startups show more maturity about employee share options than South-east Asian ones: report

ABOUT half of the founders of startups in India say they understand employee share option plans (ESOPs). Over in South-east Asia, the figure is lower — about a third, says a report by venture-capital firm Saison Capital.

Another area in which Indian startups are faring better than South-east Asian ones in the handling of ESOPs is that nearly half of these Indian businesses give their employees more than 12 months to exercise their options. Only 37 of South-east Asian startups do so.

And only 6 per cent of India startups dissolve all options when employees leave, compared to 20 per cent of South-East Asian startups.

Indian startups also do slightly better in that ESOPs are explained to employees during the interview phase or at the point of the job offer; 9 in 10 startups do this, compared to 7.5 out of 10 startups in South-East Asia.

Looi Qin En, principal at Saison Capital, said: “What was most surprising about the India edition of our report was the employee-friendly practice of, for example, offering more than 12 months to exercise the options, which gives employees sufficient time to shore up capital.”

For the India edition of the “State of ESOPs” report, Saison Capital surveyed 260 startup founders from 264 companies. (*see amendment note below)

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There are, however, some areas for Indian startups to work on. One is that ESOP pools remain relatively stagnant, because founders fail to do top ups, given that top-ups and buybacks are the least understood aspects of ESOPs among the sample of Indian founders — 59 per cent said they didn’t understand top-ups; 51 per cent said they didn’t understand buybacks.

More than three-quarters (78 per cent) of Indian startups at Series A and beyond have ESOP pools of under 10 per cent of the total company equity; about a fifth (22 per cent) have pools at between 10 and 15 per cent.

Few Indian startups — only 2 in 5 — have defined their “leaver policy” — that is, where the company stands on whether employees still get ESOPs when they leave. (A good leaver policy allows this.) This lack of clarity could create potential conflicts when an employee leaves the company.

Hard-copy paper processes are being used by 28 per cent of Indian startups; another 47 per cent use Excel spreadsheets. Only 20 per cent have adopted purpose-built dashboards, making such companies transparent to employees about their ESOPs.

Visa Kannan, partner at Saison Capital, said: “With a record-breaking US$63 billion invested in Indian startups in 2021, the technology ecosystem of the second-largest population in the world has matured, and a new era has arrived — one in which opportunities are created at an unprecedented pace. Cash-based compensation is no longer sufficient to attract and retain talent in high-growth technology companies. Yet, we often hear from founders about challenges on how to structure effective ESOPs.”

*Amendment note: Saison Capital has clarified that it has sampled 264 companies rather than 107 companies.