Bangalore According to a report by venture capital firm Sasson Capital, nearly half of Indian startup entrepreneurs say they understand employee stock option plans (ESOPs), far more than their counterparts in Southeast Asia.
Another area where Indian startups outperform Southeast Asian startups in terms of ESOPs is that more than half of Indian companies give their employees more than a year to exercise their options, while only 37 Southeast Asian companies do this. When employees leave, only 6% of Indian firms forego all options, compared to 20% of Southeast Asian startups.
Sasson surveyed 268 startups, with the firm’s portfolio companies making up less than 5% of the respondents.
However, there are some areas in which Indian business can improve. One is that ESOP pools remain relatively stable as founders fail to top-up, given that top-ups and buybacks are the least understood parts of ESOPs in a sample of Indian founders. 59% said they do not understand top-ups, while 51% said they do not understand buybacks.
In addition, three-quarters (78%) of Indian startups in Series A and beyond have ESOP pools of less than 10% of total company stock, with nearly a fifth (22%) having pools between 10% and 15%. . Only 2 out of 5 Indian businesses have established their “vacation policy”, or how the company feels about whether employees still earn ESOPs after they leave. When someone leaves the organization, this lack of transparency can create problems.
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“With an investment of a record-breaking $63 billion in Indian startups in 2021, the technology ecosystem of the world’s second largest population has matured and a new era has begun, creating opportunities at an unprecedented pace. Cash-based compensation is no longer enough to attract and retain talent in high-growth technology companies. Nevertheless, we often hear about challenges from founders on how to structure an effective ESOP,” said Visa Kannan, partner at Sasson Capital.
According to the report, culture, ownership and retention are the key motivators for founders to implement ESOPs.
ESOPs are more likely to be implemented by founders to create a rewarding culture with a sense of ownership while retaining and recruiting talent. Only a small percentage (25%) of entrepreneurs see ESOPs as a way to save money on salaries and other benefits. The report noted that ESOPs can reduce upfront payment costs, but are far from a “cheap” solution, especially given how they reduce the stock pool for future fundraising.
Most Indian startups offer ESOPs to employees beyond the senior management team. About 1 in 3 offers ESOPs to all employees, regardless of rank. This approach aligns incentives and motivation throughout the organization and nurtures a culture of ownership.