In comparison to their counterparts in Southeast Asia, roughly half of India’s entrepreneurs say they understand employee stock option (Esops) plans better, a report has said.
According to Singapore-based venture capital company Saison capital’s report, when it comes to Esops, Indian companies outperform their Southeast Asian peers as they give their employees more than a year to exercise stock options, whereas, in Southeast Asia, only 37 companies do so. Additionally, when employees depart, only 6% Indian startups dissolve all options compared to 20% Southeast Asian startups.
Out of 268 startups surveyed, less than 5% are a part of Saison Capital’s portfolio.
The report further states that nearly 78% of Indian startups who are in their Series A stage or above, have Esop pools comprising less than 10% of total stock. Around 22% startups have pools of 10-15% of total stock of the company.
Only 2 out of 5 new businesses in India have an established ‘leave policy,’ which essentially determines the company’s intent towards whether an employee may retain their stock options after leaving or not.
“With a record-breaking $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,” said Visa Kannan, partner at Saison Capital.
Esops are more likely to be implemented by founders to retain and recruit talent, as well as to create a rewarding culture with a sense of ownership. Only a small percentage (25%) of entrepreneurs see Esops as a way to save money on salaries and other benefits. While Esops can lower upfront pay costs, they are far from a ‘cheap’ solution considering how they diminish stock pools for future fundraising, the report stated.
Majority of Indian startups offer Esops to employees beyond the senior management team. Nearly 1 in 3 offer stock options to all employees irrespective of rank, it said.
The report by Saison has, however, highlighted some areas in which Indian businesses can improve. One being, a change in Esop pools that often remain relatively stagnant because founders fail to hold top-up and buyback programmes. 59% of the surveyed entrepreneurs said they didn't understand top-ups and 51% said they didn't understand buybacks.
While the majority of founders are aware of Esop vesting schedules, there is lack of understanding how to top-up these stock options. Top-ups expand the pool of unallocated shares available to attract and retain future employees.
According to the report, it is also alarming that one out of every two founders has no idea of how to convert Esops into cash through buybacks. However, we are seeing an increase in buybacks from mature businesses in India, which should serve as a model for emerging startups.
Recently, fintech Razorpay announced an Esop buyback programme of up to $75 mn for its 650 employees.