Can ESOP Help Indonesian Startups Attract and Retain Top Talent?

As Indonesia's startup ecosystem develops and begins to mature, companies now increasingly need high-quality talent to drive growth. However, the lack of skilled digital talent has been an ongoing problem in Indonesia. World Bank project that by 2030, the country will face a shortage of 9 million skilled and semi-skilled workers in the information and communication technology sector.

Joint report e-Conomy SEA by Google, Temasek, and Bain & Co. also consistently points to talent shortages as one of the main problems plaguing Indonesia's digital ecosystem.

Hunting for skilled talent is an important task for local startups, but retaining talented staff is another big challenge. High salaries and benefits are a traditional way of attracting and retaining talent. However, this strategy doesn't always work, especially when the startup faces bigger and more established rivals.

For example, Chinese tech giant ByteDance managed to hijack more than two dozen employees from Facebook's US office in 2019 by offering a 20% salary increase. This is just one example of competition between giants, but it also shows that smaller startups will have a hard time competing with big names with bigger capital.

“Startups have to compete for talent with mature companies. Nowadays, if you were a private digital company in Singapore, for example, you would be competing with Microsoft or Facebook for the same talent,” Ravi Ravulaparthi, co-founder and CEO of equity management startup Qapita, told KrASIA. "You will hijack each other," he added.

However, a method is slowly becoming the norm in Southeast Asia for small startups to attract and retain workers: an employee shareholding plan, or ESOP, an employee benefit plan that gives employees ownership rights in a company.

While ESOPs have become a major offering in mature technology ecosystems such as the US and China, awareness of the importance of ESOPs has not long been emerging in other regions such as India and Southeast Asia. ESOPs have been used by regional companies to differentiate companies from competitors and secure the right talent, Ravulaparthi said.

ESOP Position in Indonesia

In an ESOP, the employer allocates a varying number of company shares to each qualified employee, depending on the salary scale or other aspects. ESOP usually comes with a period dressing, where employees are prohibited from selling shares. Each employee's stock is held in the company's ESOP trust until the employee retires, leaves the company, or is allowed to sell their shares. Once fully entitled, the company can “buy back” shares from employees, either in its entirety or periodically through liquidity or buybacks.

The plan was created to increase the dedication of employees to achieve positive results for the startup, as the value of their shares will increase along with the value of the company. By owning shares in the company, employees are less likely to leave, thus potentially reducing level turnover employees for startups.

“It is not only the concept of future profit that will help recruit the best talent to join the company at an early stage. It is also a concept 'skins in the game', to foster employees' sense of belonging to the company, because there is an interest in increasing the value of the company," said Winnie Khoo, partner at Singapore-based venture capital firm Antler.

Ravulaparthi explained that Indian technology companies only started implementing the ESOP plan in the last three years, while in Southeast Asia, especially Indonesia, the concept is only starting to become popular.

One of the factors for ESOP adoption was the increased awareness among tech workers about the scheme, Khoo explained. “Employees are now more aware of the value of ESOP than exit or secondaries what has happened, and see firsthand how it brings monetary value to the old employees,” he added.

Early-stage companies can also use ESOPs to attract talent, even when they can't afford high salaries, Khoo said. ESOP is also a good strategy for advanced companies to retain seniority and recruit foreign talent. “ESOPs can help reduce churn employees, and for top employees, the ESOP can also be used as a reward system in addition to bonuses. You can issue an ESOP not only during hiring but continuously throughout the employee's life," he said.

a joint survey conducted by VC firm Monk's Hill Ventures and human talent recruitment platform Glints found that in Southeast Asia, equality is a common compensation for C-level staff and other executive-level employees, but is not limited to junior or mid-level employees. The survey stated that less than 32% of participants were compensated in the form of equity. The preference for cash payments is the main reason for the low proportion.

KrASIA confirmed with Grab, Gojek, and Tokopedia that they offer ESOP for their employees. But these companies do not offer details about the period dressing, distribution of shares among workers, or eligibility standards.

A senior employee at an Indonesian unicorn e-commerce said that he had joined his company's ESOP, with a period of dressing two years. "That's a good thing, but I didn't expect much. Even if I disburse it now, the amount is not as much as my basic salary, so it doesn't matter much,” he said, asking KrASIA not to mention his name or the company he works for.

Other workers see the ESOP as a lucrative advantage. “I was aware of the ESOP at a tech company but it wasn't offered when I got this job. However, I want to be a part of one of them. I think it could serve as a kind of savings or investment in addition to my salary and benefits,” the customer service representative for the hotel startup told KrASIA. He or she will consider moving to another company that offers similar or slightly lower salaries and benefits but with an equity stake behind it.

Lack of awareness about ESOPs among employees is one of the problems, Ravulaparthi said. “Many founders have told us that having an ESOP is good, but they have to explain the value of that ESOP to their employees.”

"Regarding the salary is quite understandable. ESOP is also a form of compensation, but it needs to be understood by employees in order to feel privileged to receive the compensation,” added Ravulaparthi.

Founders also need to better understand what an ESOP is and how to offer the system to employees successfully, said Casper Peh, CEO and founder of Antler-backed ESOP management platform Svested.

“Currently, all information on ESOPs is based in the US, and there is not much information online for this region. As such, founders often don't know how to do it, and there's a huge information gap,” he said. “This is a situation where founders don't fully understand and, as such, can't use this powerful tool for quality hiring.”

Tokopedia is one of the companies that offer ESOP plans in Indonesia. Documentation by Tokopedia

The next plan

Indonesia currently has more than 2.000 startups operating, according to data from the country's Ministry of Communications and Information Technology released in 2020. The number will continue to grow as the value of the country's digital economy is projected to reach USD 125 billion by 2025.

“Indonesia's startup ecosystem is one of the fastest growing. As the startup ecosystem is growing rapidly, the ESOP option will be available,” said Ravulaparthi.

Venture capital firms also play a role in increasing ESOP adoption among technology companies. Both Khoo and Ravulaparthi agree that ideally, a company should set aside 10% of its cap table for ESOPs. “In our investment round, we already required the founders to set aside this amount for the ESOP,” Khoo said.

Equity management platforms such as Singapore-based Svested can also help founders and employees understand ESOPs better. “They help employers manage and run ESOPs, and help provide employees with better information about their values. Knowledge of the benefits of ESOPs will become more common, and execution by founders can be more robust and flexible,” added Khoo.

However, Ravulaparthi said the founders should also think about liquidity options. Employees in public companies can redeem their shares at any time in the stock market, but the situation is not the same for shareholders of private companies. Not many companies have frequent repurchases or liquidity events, which can result in employee stock being essentially "lost". "In addition to being creative, you also have to give employees the opportunity to sell on time, so they can make money from the ESOP," he said.

Peh and Ravulaparthi say that in Southeast Asia, the period dressing the standard is three to four years, although some companies offer a shorter period of two years. Going forward, Peh said that companies should start including more frequent liquidity events for ESOP holders in fundraising rounds.

“For example, of the USD 50 million raised, around 1 million to 2,5 million could be used to help cash out old employee. Apart from that, it could also be a way for private or angel investors to join the round and do some sort of liquidity for early employees,” he said.

As many Indonesian technology companies are eyeing initial public offerings or IPOs, this could help increase the popularity of ESOPs, Peh added. “IPOs can have a positive impact as many employees will be able to cash in and generate significant financial returns. This will set a good precedent and increase the value of the ESOP,” added Peh.

-This article was first released by KRASIA. Re-released in Indonesian as part of the collaboration with DailySocial