An average start-up will have an Employee Stock Ownership Plan (ESOP) of 7.5-10%. ESOPs are employee benefits that give workers ownership of shares within the company they represent as a form of compensation. It can be seen as a mutually beneficial tool for both employees and employers. Employers utilize ESOPs to attract talent in an ever-challenging labor market, incentivize loyalty amongst employees and most of all, benefit from cash cost-savings on payroll. Correspondingly, employees have the opportunity to become shareholders and earn ownership for their hard work by being invested and rewarded as the company grows.
It is estimated that the value of ESOPs amongst Southeast Asia’s approximately 730 post Series A startups alone is over $7 billion dollars. With the recent successful listing of GRAB on the NASDAQ exchange, Deal Street Asia has put forth a strong case that ESOPs will continue becoming more and more popular as it has in more mature markets across the globe. Despite this, a recent report by Singaporean based Saison Capital indicates there is a lack of awareness and understanding of ESOPs and that this particular tool has been underutilized and in certain cases, wrongly utilized within the start-up ecosystem.
Employees in Southeast Asia time and again choose cash salaries over ESOPs due to a mistrust in the value of ESOPs and as a result, start-ups have greater difficulty recruiting talented work forces without paying hefty cash salaries that they cannot always afford. ESOPs have lost their attraction due to their severe illiquidity until the company’s IPOs, which is often a timeline that is not in the hands of any one single employee. Herein lies a fundamental flaw and challenge that needs to be addressed in regards to the successful implementation of ESOPs.
Start-up employees earn shares as compensation for their hard work. This compensation, however, is not fully in their control as they are unable to liquidate vested shares as they please pre-IPO. Employees may have their own priorities and financial preferences and should have the right to sell vested shares in accordance to their prerogative. This illiquidity impacts the effective implementation of ESOPs and disincentivizes employees from wanting them.
On the flip side, retail investors and personal investors may be interested in investing in particular start-ups but do not have the resources, the technical expertise nor the access to compete with established investment firms. Accessing ESOPs and buying them from employees who are interested in liquidating their equity can be identified as a potential solution to the above problems. A strong case can thus be made for the establishment of secondary markets to unlock the true value of ESOPs while allowing more investors to access opportunities.
Check out WOWS ESOP Management Solution