The shares that bind: employee stock options in startupland
ONE of the few upsides of working in a technology startup is the possible pot of gold at the end of the road, in the form of lucrative piles of startup stock options. More in South-east Asia are getting compensated this way, but workers often cannot cash it in because of certain terms that act as a golden handcuff rather than a staff benefit, a recent survey by Saison Capital and Svested showed.
When employees leave startups, they typically have the opportunity to exercise the options they have accumulated in their time there at a low price. It turns out, that's not the case in South-east Asia. Only about a third of founders offer a low or negligible strike price. A majority of founders - or 45 per cent - in the region have set these strike prices in line with their company's share price in its latest fundraising round, the survey showed.
With share prices of billion-dollar startups reaching hundreds of dollars, this means that many employees would have to cough up a significant chunk of cash upfront just to exercise their options in later-stage startups. If workers cannot afford it, they would have to give up their hard-earned stock options.
What makes it worse is that 50 per cent of the startups surveyed give employees 6 months or less to come up with the money to exercise these options once they leave. If the startup is successful, they will also need money to pay taxes that will be levied on the increased value of the stock.
Many startup employees in South-east Asia are left with no choice but to give up their stock options because such predatory terms in their employee stock ownership plan (Esop) contracts have made them too difficult to claim, The Business Times reported earlier in August. Some have to shell out up to hundreds of thousands of dollars upfront just to exercise their options, without any certainty of future liquidity.
SEE ALSO: Esop fables: A cautionary tale for those joining startups
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Furthermore, about 20 per cent of startups dissolve all options (vested or otherwise) when an employee leaves. This means the worker will get nothing once they choose to exit the company, even if they stayed at the company for more than 10 years.
"This acts as golden handcuffs, tying people to a role as they receive zero upside to the company's success if they leave," the report noted.
Vesting cycles in South-east Asia startups typically follow the standard structure, where schemes have a 1-year cliff followed by equal annual vesting over 4 years. This means that if an employee leaves or is let go before the first year is up, he will not have any options.
If he stays on, he will vest a quarter of his options each year. By the fourth year, he will be able to claim all of his stock options.
About 67 per cent of startups in the region are following this structure, allowing options to be vested over 48 months with a 12-month cliff. A majority - or 72 per cent - of startups also adopt "linear vesting structures", said the report, which means employees get an equal part of their options each time.
About 32 per cent of startups have a monthly vesting schedule, while 35 per cent adopt an annual vesting cycle.
The survey also found that about 90 per cent of leaders do make the effort to personally explain Esops to their prospective hires, with about 75 per cent doing this before the candidate accepts the role.
But many founders themselves tend to be unfamiliar with the ins and outs of Esop schemes. The survey found that there is a "lack of understanding" by founders of how to use Esop beyond the basics, in helping employees to cash in these options that were received in compensation packages.
It is ironic because Esop schemes have been long touted as an employee benefit. More startups in the region are implementing Esops as a way to attract and retain talent. Yet, many founders are seemingly clueless as to how they can actually make it lucrative for their staff.
"It is also concerning that founders do not understand Esops top-up: growing the pool of stocks that can be allocated to Esops. This explains why Esops do not grow across subsequent rounds of funding," the report added.
It pointed out that Esop pools - the amount of stock options set aside for employees - have been stagnating at later stages, with 56 per cent of later-stage companies offering less than 10 per cent of their stock to employees.
"Having a solid Esop strategy is crucial to a startup's growth but until now, industry best practices have been opaque at best," said Looi Qin En, principal at venture capital firm Saison Capital.
Saison Capital and Esop management platform Svested surveyed 134 startups across South-east Asia.
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