An ESOP Story: Policy Roadblocks for Thai Startups

Published in

The Aim is The Way

8 min readOct 13, 2021

Although Employee Stock Ownership Plans (ESOPs) have been around in Thailand for over a decade, what is considered a norm for startups is a rarity amongst ours.

Investopedia defines ESOP as “an employee benefit plan that gives workers ownership interest in the company”.

This equity compensates workers for taking on the higher-risk, lower-pay startup roles compared to their corporate counterparts, helping them to attract talent while preserving (often limited) cash flow.

It also aligns employee motivation with those of shareholders, forging a (literal) sense of ownership and encouraging them to stay, especially when shares are vested, or gradually given when milestones (e.g. performance or tenure) are hit. Ravi Ravulaparthi, CEO of Qapita, a cap table and ESOP software and solutions provider, explains the ESOP philosophy, “Investors will think of returns, employees will think of compensation, but owners will think of contribution.”

With workforce supply quoted as an obstacle across the board, any incentive to draw talent into the startup ecosystem deserves some attention. But given the choice, would employees accept the uncertainty of realizing future cash over for-sure cash, right now?

A 2018 WEF Survey on 64,000 ASEAN youth found that 17% work in an SME, while only 7% want to work in an SME in the future. Nonetheless, Thai youth may not be as risk-averse as the numbers imply: although 26% work for themselves today, 36% would like to in the future. With the right incentives, these entrepreneurial risk-takers may be persuaded to join the SME space.

And even if workers want ESOPs, can Thai SMEs provide them? The short answer is yes, with big caveats. Here’s the long answer:

SME ESOP regulation doesn’t exist in our current Civil and Commercial Code, which is Thailand’s fundamental set of laws. Many startups have verbally promised shares to employees, when, and if, they become successful, and unlike investors, employees don’t usually demand documentation. This potentially leaves the employees short-changed once the company is successful, due to new constraints and new shareholder groups, especially without the law to dictate.
Back in 2017, the Ministry of Commerce and NIA proposed an SME draft regulation. However, the Cabinet called for additional changes, few of which relate to ESOP and vesting10. The updated draft is now under the Ministry of Commerce’s review, with no specific timeline to propose to the Senate. The proposed changes are shown in the diagram below.
SEC’s PP-SME Program, which launched in early 2020 and opened the window for directors and employees in SME and startup limited corporations to own stock options, saw very low uptake (as of August 6th, 89 companies have signed up)11. The reporting requirements seem reasonable12, despite having to register to a few governmental agencies and mail in documents2. However, tax considerations may deter many:

Income Tax: For employees to own shares, the company must issue a cash bonus, which is then used to buy those shares. This doesn’t match SME reality, where most don’t have enough funding to give bonuses. To top it off, this bonus is taxed as personal income.

Recommendation: Allow startups to issue ESOPs without the need to trade (this will eliminate the need to tax shares as income). In Singapore, taxes are imposed only when employees exercise the option (fair market value of the share — exercise price), and not when shares are granted, vested, nor sold.

2. Tax Ambiguity on Vested Shares: Although the PP-SME Program allows shares to either be sold outright or vested, and unvested shares can be held in an SPV to prevent the dilution effect, it is unclear how these shares will be taxed. In a DCT talk in March 2021, the SEC said that the nature of ESOP taxation has not been finalized.

Recommendation: Issue clear guidelines on the vesting structure and its tax implications. Although Singapore doesn’t allow a company to own its own shares, there are clear regulations around setting up a trust structure, which is managed by the company.

For listed companies, although regulations do not prohibit ESOPs, they don’t entirely enable its creation. Pakapak Sangkhasuntorn, Startup Studio Assistance Manager at Zero To One by SCG, explains three ESOP considerations for (large) listed and limited companies:

Allocating a pool for employee stock options (e.g. deciding where they are pulled from and obtaining shareholder approval — ideally, this pool should be set aside before the company goes public).
Setting a strike price (i.e. choosing to set at market price or at par, at a certain time).
Setting a vesting structure (i.e. number of years, percent vested per year).

*Question marks (?) are for elements that are still uncertain (information has not been released). If you have more information, please reach out to us below.

While the regulations untie their knots, what can a startup or SME do in the meantime?

Issue virtual ESOPs, or phantom stock. A synthetic instrument, it simulates the economics of an ESOP, minus the paperwork. With these non-existent shares, employees are entitled to a cash-out bonus at a certain price through a private contract with the company. The added requirement compared to traditional ESOPs is that the company must put in place a buyback mechanism (i.e. how the company will eventually buy the stock back when the employee wants to exit, as it will never translate to real shares).

We’re still in early days to confirm whether this mock share will have the same motivational effect on employees. Ravi thinks the key is employee belief:

Believing in and understanding ESOPs.
Believing in how synthetics work.
Believing in the company’s ability to buy back or create stock liquidity.

The first two will build over time, with new success stories of how people have created wealth from these options. The third depends on the company.

Transfer shares to employees without creating an ESOP, from:

The company’s pool: The downside is ending up with a long cap table — with too many minority shareholders, you might burn valuable resources to keep that structure (e.g. running around collecting signatures for shareholder meetings).
The founder’s pool: Ken Jarurangsiwat, PetPaw CEO, created a vested employee joint investment plan (EJIP), where full-time employees can exercise stock options by diluting the founder’s shares. PetPaw also extended this option to its outsourcing and advisors, who may have higher expected compensation: by providing a combination of base salary and EJIP, the company is able to attract talent without a huge strain on cash flow.

Nick Kanakakorn, Blockfint CEO, also set up an employee stock option plan from the founder’s pool. Because this option isn’t supported by Thai law and is barely covered by the SEC, it is more difficult for Thai companies to compete with those in Singapore and the US. Nick plans to move Blockfint to either country in the future, and explains a potential con to this approach:

(-) Under the founder’s pool, the founder is liable for tax payments when employees realize a capital gain on their shares, which Blockfint has yet to run into. In this case, the company must find a way to compensate the founder. The solution would be to allow companies to hold their own stock options (proposed under the new regulation).

(-) Ravi notes that this approach may not be scalable, as it is a private contract between an individual and an employee (e.g. 100 employees = 100 contracts with the founder). An alternative, which is allowed in Singapore, is to set up the trust vehicle, where the founder can be the trustee on behalf of employees.

Move to Singapore, where regulations are more flexible and supportive. Ravi points to four key elements that make Singapore’s ESOP regulations successful in enhancing the startup ecosystem -

No capital gains taxes on shares,
No taxation at the time of vesting,
Ability to create trust structures to hold employee shares, and
Flexibility in offering shares to anyone (not just to employees, but to compensate consultants and advisors) at the discretion of owners.

On the flipside, there are few ESOP barriers in Singapore, which gives us some foresight: for one, each company is imposed a limit on the number of shareholders it can have before it is deemed a public company, which comes with higher disclosures. Singapore has a 50-shareholder limit, and companies can work around this by -

Creating a moratorium (i.e. restrict employees from exercising their shares until a liquidity event, listing, or sale), or
Forming an employee trust, where the SPV itself becomes the shareholder.

Here, India is one step ahead: ESOP holders are excluded from being counted as shareholders under the deemed public-company limit.

With clear and enabling regulations, the ESOP can become a 2-fold positive magnet for our startup and SME ecosystem: 1. attract and retain talent, and 2. deter high-performing start-ups from hopping on the flight to Singapore. They may one day turn into a unicorn, creating future millionaires (i.e. employees with an ESOP), who often become angel investors. Ravi says, “It’s very rare to have a unicorn without employee stock options.. Out of the 700+ unicorns in the world today, you probably will have less than 5% without a 5% employee ownership.” Close to home, Zomato’s IPO in India created 18 millionaires out of ESOPs.

As with every Aesop story, let’s end with a takeaway: ESOPs have been around in Thailand for over a decade, and they are here to stay, if instead of stumbling over these roadblocks, we turn them into milestones. And achieve them.

*If you have new information regarding the contents of this article and would like to share, please comment or send us a message — we’ll update the content.

Additional ESOP Resources

Qapita’s Resources which include blogs for founders to set up and implement ESOPs, and downloadable, open-source ESOP templates.
Employee Joint Investment Plan (EJIP) downloadable template.

Thank you to my co-author Sheena Narula for making this article possible!

Contributors

Ravi Ravulaparthi is the CEO and Cofounder of Qapita. He has 17+ years of experience as an investment banker, and specializes in mergers & acquisitions, capital raising, corporate finance and angel investing. He has advised founders and private companies, with transactions worth over $2.0 billion.
Prachi Worlikar is the Head — Product at Qapita. She is a subject matter expert in ESOP administration, valuation, and accounting, and has 17+ years of experience in the equity compensation domain. She is a CA rankholder, CPA (USA), and a Certified Equity Professional (a US-based qualification for Stock Plan Professionals).
Ken Jarurangsiwat, CEO of Petpaw.
Nick Kanakakorn3 is the CEO at Blockfint, whose mission is to create a technology where all parties have equal accessibility. He worked with multiple early-stage startups in Silicon Valley for more than 20 years, until 2017. Back in Thailand, he brings his distributed system expertise and Silicon Valley work culture to Blockfint.
Pakapak Sangkhasuntorn4 is a Startup Studio Assistance Manager at Zero To One by SCG, with more than 13 years’ experience in the HROD field with corporates and start-ups in Thailand. Passionate to build a sustainable digital / innovation transformation, especially in the way of work, in an organization.