Culture, ownership and retention are key motivators for founders to offer ESOPs, according to the report
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Roughly half of Indian startup entrepreneurs say they understand employee stock option plans (ESOPs), far more than their counterparts in Southeast Asia, according to a report by venture-capital firm Saison Capital said.
Another area where Indian startups outperform Southeast Asian startups when it comes to ESOPs is that more than half of Indian companies give their employees more than a year to exercise their options, whereas only 37 Southeast Asian companies do so. When employees depart, just 6% of Indian firms dissolve all options, compared with 20% of Southeast Asian startups.
Saison surveyed 268 startups, with the firm’s portfolio companies making up less than 5% of respondents.
However, there are some areas in which Indian businesses can improve. 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 parts of ESOPs among the sample of Indian founders. As much as 59% said they didn’t understand top-ups, while 51% said they didn’t understand buybacks.
Moreover three-quarters (78%) of Indian startups in Series A and beyond have ESOP pools of less than 10% of total company stock, with roughly a fifth (22%) having pools of between 10% and 15%. Only 2 out of 5 Indian businesses have established their “leave policy", or how the company feels about whether employees still earn ESOPs after they depart. When an individual departs the organization, this lack of transparency may cause problems.
“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 begun, 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.
Culture, ownership and retention are key motivators for founders to implement ESOPs, according to the report.
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. ESOPs can lower upfront pay costs, but are far from a “cheap" solution, especially considering how they diminish stock pools for future fundraising, the report stated.
The majority of Indian startups offer ESOPs to employees beyond the senior management team. Nearly 1 in 3 offer ESOPs to all employees, regardless of rank. This approach aligns incentives and motivations across the organisation and nourishes a culture of ownership.