Dreams of big stock payouts up in smoke for startup workers

Singapore

FOR startup workers, the past few weeks have been sobering. Many had bought into the industry's change-the-world ideals, had few boundaries between their work and personal lives and hoped for big payouts if their startups had a successful exit.

Now some are being laid off over video calls.

The windfall that startup employees were expecting from stock options plans has taken a back seat as they focus on the struggle to keep their jobs during this layoff season amid the Covid-19 pandemic and an impending recession.

Many startups offer employee stock option plans (ESOPs) to entice top talent in place of an attractive salary package. These ESOPs, which usually have a vesting period of about four years plus a one-year cliff, have also helped to retain talent and motivate employees to work towards a common goal: the unicorn dream. As such, companies allocate as much as about 20 per cent of their share capital to ESOPs, several sources told The Business Times.

"Some employees care a lot about ESOPs as they appreciate the company's plans for the future and want to play a key role in helping to build its vision," said Luan Huan Bo, chief executive and co-founder of artificial intelligence startup 6Estates.

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"ESOPs are a great way for a company to incentivise their team, where team members will have a vested interest in growing with the company and be a part of its success story," said Kuldeep Singh Rajput, co-founder of health tech startup Biofourmis. "Typically, we have seen a lot of stories where employees have received a few million dollars during an exit because of ESOPs. That value of return is very unusual and unseen in a big corporate," he added.

But, plans for initial public offerings (IPOs) are on hold amid the uncertain climate. Startups and their investors, who witnessed a string of disappointing IPOs last year, are becoming more cautious and are staying private for longer.

Industry players say these stock options are now less appealing to top talent, especially with an IPO dream further from sight. "It is less attractive in the current climate as employees would have to hang on longer to their options or shares without the opportunity to cash out," said Ray Chiang, a partner in law firm Dentons Rodyk's employment practice.

Associate professor Lawrence Loh from National University of Singapore's (NUS) Business School echoes a similar sentiment: "We expect top talent to gravitate toward the safer haven of bigger entities like MNCs or even public service.

"Startup employees might be also thinking of exit strategies, except that these are personal ones," he said.

There are also situations where employees who are holding on to shares may wish to exit and get back the subscription price that they have paid due to the lack of liquidity of the shares and the lack of visibility of success of a startup, said Mr Chiang.

"However, they may discover that they don't have contractual rights to seek a repurchase from the company and in that sense they are stuck with those shares," he said, adding that disputes might arise for these cases.

But Mr Rajput from Biofourmis said that to make an impact with an ESOP, employees should look from a longer term perspective - for three to four years at least. With that perspective, Covid-19 might just prove to be a blip in the overall plan.

"There is always a risk and if the company can sustain in a situation like Covid-19, it would certainly do well. There might be a reduction in attractiveness... but beyond the monetary incentives, there is still a sense of ownership and a sense of belonging.

"I think that is the main driving factor."

*For an in-depth look at how startup employees are bearing the bulk of the strain from Covid-19's impact on the venture industry, read "Lights out for struggling startups" in tomorrow's BT.