ESOPs pick up steam in SEA as tech winter bites

Should employees who share in the risks of building a startup also reap the rewards with the leadership team?

It seems an increasing number of startups in Southeast Asia and India believe they should. A survey on employee stock ownership plans (ESOPs) has found that more firms are offering this benefit.

Image credit: Timmy Loen

In 2021, six out of 10 startups had implemented ESOPs. Today, adoption has grown to eight out of 10, according to a study by Saison Capital, XA Network, and Carta. The first edition of the study was carried out in late 2021.

Since then, the bite of the tech winter has been felt across the region, and fundraising is down significantly. But how has that changed the state of ESOPs?

Why ESOPs?

Simply put, an ESOP gives an employee stock in a company if certain conditions are met.

As an investor, seeing a founder’s commitment to ESOPs reflects both maturity and a nuanced understanding of long-term value creation.

I’ve also seen firsthand how ESOPs play a pivotal role in attracting top talent, particularly in emerging markets where talent is scarce.

See also: Preference shares in your startup’s funding deal? Be careful

For instance, D3 Labs – one of Saison Capital’s portfolio companies – attracted senior executives from firms such as DBS and Macquarie Group even before raising its pre-seed round, partially because of the effective use of ESOPs.

Implementing the scheme requires planning and preparation, but it’s often a positive indicator for investors.

Adoption on the rise

Diving into the results of the survey show that, in addition to the increased adoption of ESOPs by startups, companies are implementing the programs earlier. In 2021, 82% of startups implemented ESOPs before series A funding, and today, that number stands at 92%.

Challenging macroeconomic conditions appear to be a big driver of ESOPs, as 40% of founders currently implement such schemes to save costs and increase liquidity. To put this in context, that figure was at 28% in 2021.

Inclusivity

Work to be done

Beyond talent acquisition