Understanding the Company's Share Ownership Program among Startups

Employee Stock Option Program (ESOP) is one way to get employee loyalty. This program basically distributes a portion of company ownership, in the form of shares, to employees. This program is commonly used by public companies, as well as startups. It's just that this option is still not popular in Indonesia for several reasons.

Davehunt International Indonesia CEO David Wongso explained, ESOP is one of the monetary rewards to create alignment antara financial objectives company and employees for longer term. ESOP is usually suitable for a growing company scenario so that there is potential upside. This man, who has studied the HR industry for years, thinks that ESOP is not appropriate if applied to industries that are sunset or stagnant.

"Employees must do an analysis, if the company offers ESOP by buying at a certain price. Is the purchase price cheap? How? potential upside-his? Because if the stock turns out to be stuck when the IDX plummets or a pandemic like today, then the money is locked and even loses, "explained David.

If the startup has not yet conducted an IPO, the value of course depends on the valuation. The more investment you get in subsequent funding, the higher the value of the stock will be. This calculation must be considered, especially if an offer comes.

David gives the view that ESOP is important to be carried out by companies that have good governance.

ESOP at Startup

One of competition in the startup industry it's not only about the market and users, but also talent. The transfer of talent from one startup to another is no longer a new thing. There is a term “pirate talent” among startups.

In Silicon Valley, many startups eventually offer ESOP programs to "hold" their best talents, as well as foster a sense of ownership that can motivate employees to work optimally.

As of 2017, America's National Center for Employee Ownership (NCEO) estimate there are 7.000 ESOPs with 14 million employees involved. Besides ESOP, there are about 2000 programs profit sharing in America which is applied to share profits with employees.

In Indonesia, several companies have already implemented ESOP. At a unicorn startup, for example, they provide a specified ESOP quota vested every 4 years with a distribution of 25% each year (with the number of shares that do not fixed). Shares owned (supposedly) can be sold in secondary market after vested. There are other unicorn startups that apply a similar strategy. However, employees tend to hold their share, not try to sell it, because they think the valuation will be even higher.

Designing a stock ownership plan for employees is not easy. There are several important considerations and calculations that must be passed to determine the allocation of shares prepared for employees, co-founder, and management.

As we all know, startups are fast-growing companies. The size of team members can go up several times in just a matter of years. Determining when this program will be implemented will be fundamental before this plan is implemented, including plans dressing.

What also needs to be considered is the mechanism by which employees can redeem the shares given. If the company does not have an IPO plan, what is the mechanism buyback stocks and the like.

I spoke with Bhisma, one of the employees of a startup in Indonesia. He believes that ESOP can have a good effect on his employees, especially if ESOP is given purely as a reward for those who have performed brilliantly during their tenure.

"For startup companies, where the work situation and work system may not be perfect, ESOP can encourage employees to be more active and contribute actively. However, what needs to be seen is that management must carefully screen which employees are possible to participate in the ESOP program. The goal is that ESOP can be right on target in the context of inviting employees to grow a sense of ownership which has an impact on improving company performance," explained Bhisma.

Problems with ESOP

Implementing an ESOP is not an easy matter. This program makes the capital structure more complex. Not to mention other calculations related to taxes and share composition.

Things become complex when employees who get share decided to leave. If you have done an IPO, employees can immediately sell their shares on the stock exchange, but if it is still private, the company must prepare funds to buy back the shares. In Indonesia, the OJK has issued regulations regarding the Buyback of Shares Issued by Public Companies through POJK Number 30 /POJK.04/2017. The regulation regulates everything related to share repurchases by public companies.

This ESOP problem also arises from the employee side. The value of shares basically follows the value of the company. The more advanced the company, the higher the value of its shares. On the other hand, when an employee saves an ESOP as part of a retirement plan but the company goes bankrupt -- this can be disastrous.

In Indonesia, ESOP has not become the main choice for startups to bind their employees. Compare options financing, the ESOP concept is considered not to provide real benefits.