ESOP 101: How It Works, Evaluating (Red Flags), Cashing Out 💰


In mature ecosystems, employees understand and appreciate the importance of Employee Stock Ownership Plans (ESOPs). However, in comparison, Southeast Asia is still in its infancy because there have yet to be many who have profited from it.

However, with the rise of success stories of early employees cashing out on their stock options and becoming millionaires, ESOP has gotten the attention of many more. The interest is growing even faster as more tech giants in the region, like Carousell, Bytedance and Traveloka, are looking to go public in 2022.

What can you expect from this guide?

You should note that as with every agreement, most Employee Stock Ownership Plans (ESOP) are different. This guide is not to serve as a one-size-fits-all guide that will cover every permutation and edge case. 

However, what this guide hopes to achieve is to provide you with an actionable and comprehensive guide that:

✅ Explain technical jargon using layman terms and examples

✅ Answer frequently asked questions about ESOP

✅ Contain industry practices in the market

✅ Warn you of potential red flags to look out for (as indicated by 🚩)

✅ Make you laugh with our attempt at memes

This guide was made with the help of Svested and Saison Capital. Huge shout-out to their detailed report ‘State of ESOPs in Southeast Asia’ - many data points on ESOP practices in Southeast Asia were from there.

TL;DR: Learn Everything About ESOP, From Evaluating It to Selling It and Paying Taxes

  • What is an Employee Stock Ownership Plan (ESOP)
  • Reasons companies give ESOP
  • The Pros and Cons
  • How does it work: Exercise Price, Vesting and Cliff Schedule, Selling Restrictions
  • Evaluating your ESOP: How much should I ask?
  • What happens when you leave a company? 
  • Selling and cashing out
  • Taxation matters
  • Other Equity for Employees besides Stock Options

What Is an Employee Stock Ownership Plan (ESOP)

An Employee Stock Ownership Plan (ESOP) is an employment benefit that grants employees the right to purchase shares of their company at a future date for a predetermined price (also known as the exercise price)

While there are many forms of equity packages for employees, this blog post will focus on stock options - they are the most relevant and common in Southeast Asia given the large surge of rising startups.

That being said, we will also be discussing the other forms of equity packages at the end of this post, such as:

  • Restricted Stock Units (RSUs)
  • Phantom Stock Plans (PSPs)
  • Employee Stock Purchase Plans (ESPPs).

3 Reasons Companies Give ESOP

1. Supplement the Compensation Package

When companies are short on cash, they may want to hire the best people but can't afford to pay them market rates. This is especially true for newer startups with limited funding.

Companies may then supplement their compensation packages with ESOP to narrow the gap between what they can pay their employees in cash and market salary.

2. More Motivated and Happier Employees

Rewarding ESOP to employees means they have a stake in the company. With skin in the game and potentially receiving monetary gains that are life-changing, they are happier at work and motivated to work more efficiently, creating a win-win situation. 

Kelvin Teo, Co-founder and Group CEO of Funding Societies | Modalku shared “Even before our Series C+ round, I am also pleased to report that 2021 saw the lowest employee attrition rate and the highest employee happiness scores since Funding Societies was founded.

3. Improve Retention and Average Tenure

With companies paying top dollars to poach tech talents, companies not only have to recruit talents but also retain them. However, this can be challenging as the tech talent war intensifies and salaries increase by 22%.

Similar to the Annual Wage Supplement (also known as the 13th-month bonus), the vesting period and cliff give employees a reason to stay longer.

For example, a 10-month-old employee with a 1-year cliff ESOP  would want to wait another two months for resigning. Otherwise, they forfeit any unvested options.

The Pros and Cons of ESOP

Pros of ESOP: Huge Financial Gains (Become a Millionaire!) 🌕

When Facebook IPO-ed a decade ago, an estimated $23 billion of financial gains were shared between over 3,000 employees, averaging $7 million per employee. 

Let's bring this closer to home. Say you were a Sea employee with $100,000 worth of ESOP when the company went public in October 2017. Because of your strong faith that the company will be the leading tech giant in Southeast Asia, you decided not to exercise and sell your stock options.

Fast forward approximately three years to August 2021. What do you think your shares are worth? $200,000? $500,000? Or even $1,000,000?

Wrong! It is worth $2,000,000!

However, do note that there will likely be selling restrictions, so you will not be able to sell your shares on the IPO day itself (more about it in 'Going Public and Listed on the Stock Exchange') If the company performs poorly in the first few months after going public, your financial upside will be limited too.

Cons of ESOP: Cash Is Still King 💵

Now imagine: instead of selling your SE stocks for $2 million, you decided to wait. I mean, after all, to the moon, right? 

Fast forward eight months to today, you woke up and realized the value has dropped to 1/3 of what you had.

This drop is not a one-off incident. Grab plunged 69% since going public in December 2021, PropertyGuru and Gogoro dropped 15% and 21% respectively within a few days.

In America, this drop in total compensation is not just affecting public companies, but also private ones. Just a few weeks back, Instacart slashed its valuation by almost 40% to US$24 billion.

TL;DR: Stock options do not guarantee that you will 'get-rich-quick'

Also read: Companies who are paying above-market salary package!

How does ESOP work?

What Is Exercise Price?

The exercise price is the price at which you can purchase the vested options. This is also known as the strike price or grant price.

For example, you are granted 10 shares at an exercise price of $1 per share. When you sell them at $10 per share, you profit $90, as computed by ($10 - $1) * 10 shares.

What Are Vesting and Cliff Periods (And Common Practices)

You can think of the vesting period as instalments where options are granted to you over your employment.

Cliff is the minimum amount of time an employee needs to stay before the ESOP kicks in and you get any options.

Image credit:

According to the report, which surveyed 134 different sizes of companies across Southeast Asia, the most common industry standard for ESOP is a 4-year vesting period with a 1-year cliff.

Breakdown of vesting period: One year (7.1%), two years (9.4%), four years (67.1%) and Others (16.5%)

Breakdown of cliff periods: None (9.4%), three months (3.5%), six months (5.9%), twelve months (74.1%) and Others (7.1%)

Other Forms of Vesting

It is worth noting that while the traditional linear vesting schedule (25% of options granted per year over four years) is the norm at 72%, there are other forms of vesting.

25% of the companies practise KPI-based vesting schedules, while 11% of them practise staggered (back-loaded) vesting schedules. 

This means the percentage of options you receive increases exponentially with your employment with the company. For example, 10% in the first year, 20% in the second year, 30% in the third year and 40% in the fourth year). Companies usually do this to improve talent retention.

Image credit: Index Ventures

Evaluating Your ESOP: How Much Should I Ask For?

Before we decide on how much ESOP to ask for, it is worth noting that only 3 in 5 startups (62.3%) in Southeast Asia have ESOPs in place. 

So, if your new offer does not come with any stock options, it does not mean that your new employers do not treasure you as an employee!

What Is a Good Amount of Stock Options?

The value of ESOPs received by senior tech talents, as a percentage of their annual cash compensation is:

  • 75th percentile: 60 to 80%
  • 50th percentile: 20 to 40%
  • 25th percentile: 0% to 20%

For junior talents, here's the numbers:

  • 75th percentile: 20 to 40%
  • 50th percentile and below: 0 to 20%

A common mistake many make is asking "how many percentages of the company's total shares should I ask for for a company at _______ (insert company's growth stage)"

This question is irrelevant because it does not tell you whether the ESOP offered to you is a good deal.

For example, would you want a stock option package that is 1) 1% of the company or 2) worth $100,000? Well, it depends on the company's valuation! If the company is valued at $1 million, 1% is only worth $10,000 - ten times less than $100,000!

But most importantly, this thought experiment is to emphasize that you should be caring more about the value of the options instead of the percentage (assuming all other factors are constant)

“You can choose between the composition of stock options and base salary”

Some companies have started offering employees multiple salary packages to choose from

  1. More salary, Less ESOP
  2. Less salary, More ESOP

Netflix does this to an extreme extent by allowing employees to choose an all-options package.

At first glance, some may deem this as a red flag:

  • Is the company trying to lowball me with a lower salary?
  • Why is the company asking me to take on more risk by getting more of the company?

However, from speaking to many founders and venture capitalists, I can confirm that most companies do not have ill intentions. They merely want to offer talents a choice based on their risk appetite and financial needs.

Employees who are risk-averse or have immediate financial needs, such as paying for their housing down payments and wedding, can opt for higher cash.

On the other hand, employees who have the privilege to take on more risk can opt for higher stock options for a more potential upside in the long term.

Doing so helps the company avoids being in the same situation Mailchimp was. When Mailchimp sold for $12 billion last year, many employees were furious because they only got a small payout since most have little to no equity in the company.

Ultimately, you as an employee have a choice! You can always opt for the package with a higher salary.

What happens to my ESOP when you leave a company?

Do I get to keep my ESOP?

Also, from the same ESOP report, this is the breakdown of what happens when an employee leaves:

  • Vested options are retained but only exercisable upon an exit (44.7%)
  • Exercise within a set period of leaving the company (28.2%)
  • All options will be dissolved (20%)
  • The company will buy back all options (7.1%)

🚩 Shockingly, 1 in 5 startups dissolve all options - this means that employees who leave a startup lose all of their stock options, regardless of their vesting status, granting no upsides should the company succeed.

If I can keep my ESOP, when do I have to sell them?

On the other hand, what about the other one-quarter of companies that require employees to exercise their options within a set period of leaving the company? What is that period given to employees to exercise?

  • 3 months (34%)
  • 3 to 6 months (16%)
  • 6 to 12 months (13%)
  • 12 to 24 months (13%)
  • 24 to 36 months (4%)
  • 36 to 48 months (5%)
  • Over 48 months (15%)
Image credit: Svested, Saison Capital

🚩 The downside of granting a short period to exercise the options are:

  1. Employees cannot raise sufficient funds to exercise their stock options, resulting in the forfeiture of any vested ESOP
  2. Gains from exercising ESOPs are taxed in Singapore, even if they are unrealized in cash (more about taxation later)
  3. Companies are too early for employees to decide if they should exercise their options. They risk losing money if they exercise their options and the company shuts down (cue: Theranos) or if the sales price is lower than the exercise price (cue WeWork's valuation falling from $47 billion to $2.9 billion)

Good/Bad Leavers Plan: I don’t always get to keep my options?

Some ESOPs will have provisions for 'good leavers' and 'bad leavers.' Depending on the grounds for their departure, these laws prescribe different repercussions for different people who leave the firm.

A typical definition of a "good leaver" can include situations in which the member departs the firm due to sickness, incapacity etc. Most startups consider employees who choose to leave as good leavers too.

On the other hand, the typical definition of a 'bad leaver' includes a company's firing for misconduct like disciplinary breaches, fraud, negligence or a breach of confidentiality. In most cases, the stock options of bad leavers are all forfeited.

🚩 You should not be considered a 'bad leaver' if you are quitting, as this would mean you forfeit your stock options - you are effectively not paid in full for your contribution.

When can I sell and cash out my ESOP?

1. Going Public and Listed on the Stock Exchange

For the longest time (and even now still), going public is the most common way employees can cash out their stock options. This is mainly done through an Initial Public Offering (IPO) or merging with a Special Purpose Acquisition Company (SPAC).

Once that happens, you can sell your shares on whichever stock exchange the company is listed on (provided there is no selling restriction)

A selling restriction is a time period within which you cannot sell your shares. For example, instead of allowing you to exercise all 10,000 of your shares at once, your ESOP may instead restrict you to exercising only 2,500 shares at 3-month intervals.

2. Acquisition

Acquisitions are one of the other liquidity events where employees can cash out their stock options. However, this does not apply to all acquisitions. Your ability to cash out (and how much) depends on the terms of your ESOP. 

For example, in the event of a stock-for-stock merger, your shares are traded for shares of another company instead, and this may or may not mean you can sell the shares. It depends on whether the other company is a public company and the terms of the acquisition.

Another common question is: What happens to my unvested stock options?

Well, once again, it depends on your ESOP. 45% of companies offer accelerated vesting, which means your unvested stock options can be liquidated too. 

🚩 A shocking 1 in 3 companies will let unvested options lapse.

Image credit: Svested, Saison Capital

3. ESOP Buyback

In recent years, ESOP Buyback has become more common amongst startups in Southeast Asia, with the most popular and recent one being Funding Societies (also known as Modalku in Indonesia)

Earlier this year, Funding Societies announced its Employee Stock Ownership Plan (ESOP) buyback for existing and former employees worth US$16 million. The ESOP buyback marks the fourth time this activity has been conducted by the FinTech platform. Prior, employees and company alumni have cashed out US$3.5 million worth of ESOP shares.

Under the buyback scheme, all eligible former and current employees would have a right to:

  • Sell their shares at no discount to the Series C+ preference share price to incoming investors (as compared to the customary 20% discount in industry)
  • Keep their ESOP
  • Convert their vested ESOP into shares

More than 120 current and former employees since Funding Societies’s inception received cash rewards from this share buyback.

How Are ESOP Taxed in Singapore?

Disclaimer: This is not tax or legal advice of any form.

Okay, now that I have sold my ESOP, what’s next?

What is taxable?

Profits from ESOPs are taxable if you are exercising employment in Singapore when the options are granted to you. This means:

  • You are working in Singapore
  • Your employment income from Singapore

It applies regardless of where you exercise the ESOP or where the shares vest.

Without Selling Restrictions

For example, if your exercise price is $1 per share, the company underwent an IPO at $10 per share, and you exercise your options today:

  • Taxable profit: The difference between the market price ($10) and the exercise price ($1) is $9 per share
  • Taxable period: This financial year
With Selling Restrictions

If there is a selling restriction and you only exercise your options on the day the restriction is lifted.

  • Taxable profit: Difference between the market price on the date the restriction lift
  • Taxable period: The year in which the restriction lift

Other Taxation Matters: Taxation Deferment and Rules for Foreigners and Permanent Residents

The above information on ESOP taxation should be sufficient, but you can visit this detailed blog post by Svested if you wish to find out more about:

  • The Qualified Employee Equity-based Remuneration Scheme (QEEBR scheme): Tax deferment on ESOP gains for up to 5 years with an interest charge
  • Deemed Exercise Rule or Tracking option: Applicable to foreigners or Permanent Residents leaving Singapore

You can also refer to the Inland Revenue Authority of Singapore (IRAS)’s website for more information on how to handle gain from the exercise of stock options.

Other Equity for Employees Beside Stock Options

1. Restricted Stock Units (RSUs)

Restricted stock units (RSUs) are a way publicly traded companies can grant company shares to employees. Upon receiving them, you can sell them on the stock market.

Similarly to ESOPs, the stocks offered are "restricted" because restrictions like vesting could apply.

Let's assume your RSUs plan is worth $100,000. Companies mainly structured it in two primary ways:

  1. By the number of shares: If the company's share is $100 per share, you receive 1,000 shares. You gain and lose from the shares appreciating or depreciating.
  2. By the dollar value of shares: You receive $100,000 worth of shares. Your compensation package is "locked-in" - you don't gain from the shares appreciating, but you are immune to dropping share prices.

2. Phantom Stock Plans (PSPs)

A phantom stock plan is an employee benefit plan that gives employees the benefits of stock ownership without giving them any company stock.

Rather than getting physical stock, the employee receives mock stock. While it's not real, the phantom stock follows the price movement of the company's actual stock, paying out any resulting profits.

By simulating stock ownership without providing it, the company ensures that equity does not become diluted for other shareholders - it is easier to manage administratively.

3. Employee Stock Purchase Plans (ESPPs)

Employee Stock Purchase Plans (ESPP) allow employees to buy the company's shares at a discount, up to 15% below market value.

If you choose to participate, you opt-in for payroll deductions for an enrolment period until a specified purchase date, at which point they are used to purchase the company's stock.

Most ESPP include a Lookback feature, allowing you to profit more because the purchase price is the market value at the beginning of the offer rather than the day the stock is purchased.

This might seem too good to be true. Well, it is, and that is why there is a contribution limit on how much of your salary you can opt in. This limits how much you can benefit, as well as protect you in the unfortunate case that the company shuts down or have a down round (valuation and market price drops)

Still Think Cash Is Your Cup of Tea?

In conclusion, ESOP is a double-edged sword. On one hand, you can become a millionaire (many have!). But on the other hand, you risk getting less of the rosy upside painted to you. This explains why many in Southeast Asia still prefer cash. After all, you see the money upfront.

You can check out how much your fellow software engineers are getting paid on NodeFlair Salaries. It is a community-contributed salary data, verified with documents, such as payslips and offer letters. Within a few months since its launch, it already has the largest pool of verified and trustworthy tech salary data in Singapore.

Special thanks to Svested and Saison Capital

Svested (pronounced Suh-ves-tuhd) is a trusted partner to founders. Our vision is to support entrepreneurs to supercharge growth, create wealth, and fulfill dreams through ESOP and digitalisation of corporate services.

As one of Southeast Asia’s leading Employee Stock Ownership Plan (ESOP) specialists, we advise founders in the planning and setting up of their ESOP scheme. As an ACRA-certified Filing Agent, we are able to handle your corporate secretarial, administrative, and compliance matters, from incorporation to exit.

We have an integrated platform for the management of ESOP, CapTable, and Corporate secretarial services (in development). Our system allows for the digital documentation and e-signatures to enhance transparency and reduce administrative hassle.

Saison Capital is an early-stage venture capital fund (pre-seed to Series B) with a focus on emerging markets.We back ambitious founders solving big problems, focused on embedded finance - non-fintech companies expanding into fintech. Each individual in our team comes from an operating background, and we are unafraid to roll up our sleeves to support our founders. We are backed by Credit Saison, a Tokyo-listed 30b AUM consumer finance company with extensive financial services across Asia.

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