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Does Indonesia lack an ESOP culture?

A pioneer employee of a unicorn startup in Indonesia got some money when they left the company several years ago by cashing out their employee stock option plan (ESOP). The employee didn’t tell Tech in Asia the exact amount, but it was enough to buy “instant noodles for a housing complex” or “siomay from hundreds of stalls.”

“The process was so simple. I only had to tell the founder, who took care of everything,” the employee recalls.

A middle manager at a multinational tech company in Indonesia says that staff could get around 60% profit by exercising their ESOPs after the company lists. Some of them have stocks worth 500 million rupiahs (US$34,200). Once exercised, they could receive 800 million rupiahs (US$54,700) – or about 15 years’ salary for the average Jakartan.

These stories are examples of how startup employees in the country can get a large amount of money from cashing out their shares. Not everyone, however, gets the same privilege.

A former executive says that despite joining Traveloka during its early years, they have no ESOP. “The company didn’t implement the ESOP mechanism until recently,” they note. Traveloka hasn’t responded to Tech in Asia’s multiple requests for comment.

Another Indonesian unicorn, Ovo, hasn’t implemented an ESOP for its employees. But a former company executive publicly mentioned on LinkedIn that one of his jobs was to “manage and process” ESOPs.

Tina Nugraheni, deputy managing director at recruitment agency Monroe Consulting Group, says that stock still isn’t a major draw for the archipelago’s tech talents. “They prefer cash or instant benefit,” she observes.

Achmad Alkatiri, who was a Shopee marketing executive and Lazada’s chief marketing officer, also says that Indonesian workers still prefer higher salaries, so ESOP isn’t popular in Indonesia. “In other countries, most startup employees became rich because of ESOP, not salary,” he said on Twitter.

A lot of this has to do with the lack of major acquisitions or public listings in Indonesia’s fledgling tech scene. Young ecosystems often face a chicken and egg situation: Without good employees, startups are less likely to succeed. But without successful startups that can turn employees into millionaires, there won’t be big exits that make ESOPs attractive.

Made with Flourish

Tokopedia and Bukalapak declined to respond to Tech in Asia’s questions about whether they have implemented an ESOP program, but former and existing staff say that they’ve done so. A Tokopedia employee also stated on LinkedIn that “advising and drafting” the ESOP procedure is part of her job.

More companies, however, may be seeing the value of ESOPs. Gojek is the only Indonesian unicorn that openly says that it has an equity program for “eligible candidates.” Ex-employees told Tech in Asia that it has been implemented since the company’s early years.

Kargo, a new logistics startup in Indonesia, mentions that since its establishment, it has given all full-time staff shares in the company.

“By owning a part of the company, we hope employees will go above and beyond to achieve success together as a team,” Tiger Fang, Kargo’s chief executive, tells Tech in Asia.

Set it up early

The unnamed pioneer employee explains that Indonesian startups usually give ESOPs because they can’t afford to match a worker’s previous salary.

“For example, the employee’s monthly salary was US$2,000. But the [new] company can only afford US$1,400, so it compensates for the difference by giving ESOP,” the anonymous employee says.

Joshua Agusta, director of venture capital firm Mandiri Capital Indonesia, says that he usually suggests founders to spare 10% of the company’s shares for ESOP in the first fundraise. If the company needs key hires after the fundraise, the pool should be enlarged.

Kargo’s Fang believes that implementing ESOP should be done as early as possible because startups need to hire the right people in the early stage.

He also thinks that having an ESOP during the seed round will be the most valuable. This can be a very appealing part of an employee’s compensation structure if a startup wants to get highly capable people who would most likely be paid with plenty of cash in other jobs.

ESOP can also be included with the ‘tag along’ or ‘drag along’ terms.

Another tricky thing about offering ESOP in Indonesia is its legality under the country’s law. Rahmat Dwi Putranto, founder of LegalGo, says that there are no rules about ESOP in Indonesia.

“Companies have to work on specific agreements outside their Articles of Association. After the vesting period has been reached, then the employee’s name can be put into the list of company’s shareholders,” he explains. ESOP can also be included with the “tag along” or “drag along” terms at the time of investment, Putranto adds.

Some startups decide to give shares in their foreign entities because “they plan to use that entity when they get listed in the stock market,” says Bono Daru Adji, managing partner at law firm Assegaf Hamzah and Partners. He has advised an Indonesian unicorn about ESOPs.

Company's shares

Source: Unsplash

A company can develop its ESOP guidelines after securing shareholders’ approval. In this phase, the company doesn’t need eligible employees to sign an agreement just yet. It can begin working on a contract that must be signed by the employee once they pass their vesting period.

However, Adji warns that under Indonesian law, a private company mustn’t have more than 300 shareholders. If it exceeds that number, the company will be treated as a public company. As such, it’s required to disclose its private information. That’s why even if eligible employees have passed the vesting period, there’s a possibility that they won’t receive their shares right away.

“Companies usually accommodate them by creating a contract mentioning that employees can get a certain amount of shares after the IPO and other related clauses,” Adji says.

Errors can also happen while founders are setting up their ESOPs, according to LegalGo’s Putranto. “Some of them put the names of their employees directly in the Articles of Association. When I ask them about it, what they actually wanted to implement is an ESOP,” he says.

How attractive are ESOPs?

A former executive who helped develop the ESOP mechanism of a fintech startup in Indonesia explains to Tech in Asia that the company offered employee shares because it wanted to do an IPO and get quality employees.

However, the ex-executive admits that the proposition wasn’t compelling enough because while the vision was there, the exit strategy didn’t seem feasible.

“Asking people to stay for four to five years and sacrificing some part of their salary to work in a private company, is not really attractive,” they say. “It’s different with companies that have been listed in the stock exchange, where the stocks can be sold directly in the public market.”

While the ex-executive got some offers from other companies to get significant ESOPs in exchange for pay cuts, they weren’t enticing enough.

I believe ESOPs will be much more valuable than cash in the future

The multinational tech company employee joined the firm before it had an ESOP, so that wasn’t what lured her in. However, the company eventually compensated employees with ESOP without reducing their salary.

“It’s like a bonus to retain employees. I don’t even know the calculation,” she says.

Monroe’s Nugraheni explains that many companies don’t talk about ESOPs during the recruitment phase because at that point, an IPO or M&A seems like a distant event. “Many companies don’t explain because [the shares are] basically ‘worth equal to zero’ unless there is an exit,” she says.

Kargo CEO Fang admits that the majority of people in Indonesia aren’t familiar with how ESOP works so they don’t understand its value. “I believe the key is to educate them and make them realize that ESOPs will be much more valuable than cash in the future,” he states.

Cashing out

The most tricky part of ESOP is cashing it out, especially for private companies. On paper, employees in unicorn startups may have a huge amount of money because of the company’s high valuation, but they may not get the cash right away due to the complexity of the process.

They have to sell it to other parties or sell it back to the company. Outside of an official buyback scheme, the sale is usually done through brokers or nascent exchanges such as Singapore’s Fundnel. Buyers are often tempted by discounts on the company’s valuation, but if these aren’t available, then they can just join the next funding round.

The companies can often block any new investor from joining their capitalization table through a right of first refusal. They’re likely to push back on any trade that carries a heavy markdown, as it sends the wrong signal to the market.

In a public or more established company, the cash-out process can be simpler. The multinational company employee says that they only have to notify the local human resources team when they want to exercise their ESOP.

Employees can then input the data on a dashboard by themselves and transfer the money according to the strike price. It took about a month for the money to be transferred to their bank account.

Some private companies decided to create a buyback share program to accommodate their ESOP holders. Former Shopee executive Alkatiri shared on Twitter that many startups are doing the same for their employees nowadays. “It will build an awareness of ESOP in Indonesia. Personally, I have felt the benefit of ESOP,” he says.

Photo credit: Pexels

Adji of Assegaf Hamzah and Partners points out that some Indonesian startups don’t want to establish a buyback program because they want to allocate their money to other aspects of the business. But having such a program enables companies to give shares to other employees and allow founders or other investors to increase their ownership.

“It’s OK under the Indonesian law, as long as the companies set the rules on who can sell the shares, when they can sell it, and other clauses,” Adji observes.

An ex-startup executive says that his former company allows its employees to cash out their ESOPs on an “extraordinary event,” which happens every year but has no specific date. All eligible staff have an option to sell the shares back to the company via that event.

The buyback program is usually set up by companies that have been operating for more than four years and have several employees who have passed the vesting period.

Selling shares in the private market can result in 25% tax under the Indonesian law.

Cashing out ESOPs can be more difficult right now because of the pandemic, according to an Indonesian venture capitalist. It’s even tougher for employees of a company that’s been heavily affected by the crisis.

“The best time to cash out ESOP is when the company raises another round of funding. For example, [if] the company just raised a Series D round, your share will be bought when the new investor comes in,” they say.

However, Assegaf Hamzah and Partners’ Adji says that selling shares in the private market can result in 25% tax under the Indonesian law, while people who sell their shares after an IPO can get a tax incentive and only have to pay 0.1% from the gross transaction value.

Short-term profits

People tend to exercise their ESOP right away when the vested period is done or when the startup finally does an IPO or is acquired.

The multinational company employee said that she and her colleagues cashed out because they were tired of working really hard. They wanted to be compensated by the profit from the ESOP. Some of them even resigned after cashing out.

I treat my ESOPs like an investment

The Indonesian unicorn ex-staff sold all of the shares when they quit the company. “I don’t want to think in a complex way, especially about money. So when I let go of the company, I let go of everything.”

However, some people keep their ESOPs even after leaving the company, hoping that its value can be higher in the future.

“I treat my ESOPs like an investment,” Amal Agung Cahyadi tells Tech in Asia. He says that he still holds shares from some of his former employers, which include two Indonesian unicorns and several startups.

Other startup employees in the country have different ESOP stories.

One ex-senior manager told Tech in Asia that it was the startup’s ESOP that convinced him to leave a big company and take a significant pay cut. He thought the startup had a good market and the potential to be acquired by larger firms.

But he eventually quit after being disappointed with the founders and how the startup was being run.

A tech executive resigned when the company distributed her ESOP as it was preparing to IPO. She made the move out of “idealism,” saying that she didn’t to factor in money in her career progress. But she admits feeling a little regret at seeing how their former colleagues could cash out their ESOPs and make a profit.

Monroe’s Nugraheni has also heard about these experiences, but she says things have changed recently. Many tech employees who want to leave their current job “will sacrifice their ESOPs and try to get it compensated by having a signing bonus” from their new company.