The Right Strategy to Roll Out ESOPs in Singapore

Singapore lies in the heart of Asia and has one of the strongest innovation ecosystems in the region.

It is considered one of the top places globally for startup talent and has one of the fastest-growing startup communities in the world. Today, its ecosystem, with circa 184 accelerators, incubators, and other intermediaries (such as angel networks), over 3,600 tech start-ups, has made Singapore a clear leader in terms of VC and PE investments in the ASEAN region, and it is ranked as one of the most developed ecosystems by global standards.

Not surprisingly, it is the top country in the Asia Pacific region for startups, and it is only growing. With a wide range of companies from deep tech to financial technology and e-commerce, there is a boom in new technology and innovative approaches that bring great value to Singapore’s economy.

In this thriving ecosystem, attracting and retaining top talent is no easy feat. Singapore attracts quality talent from around the world, and this makes it a highly competitive employment landscape. Organizations find they need to offer enticing benefits and incentives to remain competitive in this aggressive market.

Why are ESOPs ideal for Singapore?

Since Singapore is a popular hub for startups, ESOPs have become an excellent tool for these companies, benefiting both employers and employees.

1. ESOPs become a means by which they can offer a more competitive compensation package and stand a chance against larger companies without putting a strain on the company’s cash flow.
2. ESOPs are a way to demonstrate long-term company objectives to retain employees by making them stakeholders.
3. Another advantage of ESOPs is they help with raising new capital, increasing cash flows, and refinancing outstanding debt.
4. In addition, they help to build value for the company and improve employee productivity and morale.
5. ESOPs give various tax benefits to the sponsoring company, the selling shareholder, and participants.

ESOPs in Singapore: Easier to Rollout

Multiple laws regulate ESOPs in Singapore:

• The taxation laws of Singapore
• The listing manual of the Singapore Exchange (SGX)
• Singapore Companies Act

However, it is still easier for companies to roll out ESOPs in Singapore because of the following reasons:

• Lesser paperwork and process involved.
• Companies do not have to get a valuation report from a Registered Valuer.
• Singapore has tax treaties with most countries, and hence companies are exempt from paying double tax on ESOPs.
• Singapore has comparatively lower taxes than other countries (Singapore has a 17% tax rate compared to the US tax rate that can fall anywhere from 15%-35%).

However, ESOPs may not be the answer for every startup in Singapore.

4 Factors to Bear in Mind When Considering an ESOP Roll-out in Singapore

1. Employee turnover rate

A low employee turnover is vital for a successful ESOP. Without consistent employee numbers and leadership, an ESOP may not be appropriate.

2. The size of the company

Companies need to have at least 20 employees who qualify for ESOP (excluding directors and promoters of a company who have more than 10% equity in the company, every permanent employee is eligible for ESOP). Conducting a feasibility analysis will help determine if the annual revenue is eligible for ESOP.

3. What percentage of the equity to put aside for the ESOP?

Companies need to decide on and set a limit for the amount of equity they wish to share with the employees. For example, usually, an ESOP pool is around 7.5-15% of a company’s total shares.

The good thing about ESOPs is that they can be structured according to the company’s financial health, needs, and objectives.

4. Tax Implications for employees

Usually, all gains from ESOPs are taxable under Singapore law and will be taxed in the country (if they apply to employees living in Singapore). In other words, employees of any company based in Singapore need to pay tax on any benefit from ESOPs.

After considering the above factors, companies can decide if ESOP is appropriate. They can then get down to implementing the scheme.

Steps companies should take to implement ESOP in Singapore

The following are the steps that companies typically follow to implement an ESOP scheme for their employees:

1. Decide on the percentage and number of shares in the ESOP pool
2. Draft an ESOP agreement with the help of a lawyer
3. Once the agreement is complete, you would need to pass a resolution at the board meeting to authorize the directors to sign the ESOP agreement
4. The next step is to constitute an ESOP committee, which comprises the company’s directors and other officers. Once that’s done, the company is ready to formally offer ESOPs to their employees.
5. The ESOP Committee will record the proceedings of the ESOP meeting and keep the directors informed of any grant, issuance, etc., made to employees. The committee is responsible for managing and overseeing the ESOP Pool and recommending suitable actions to the company’s board of directors.
6. When ESOP has been issued to any employee, ACRA (Accounting and Corporate Regulatory Authority) has to be informed about the new shareholders, and necessary returns have to be filed
7. ‘Register of Members’ needs to be updated with the details of the new shareholders. If you need expert guidance and help to manage your cap table and ESOP workflow, get in touch with us.

Conclusion

An ESOP can be an attractive employee benefit and an effective corporate financing tool for startups in Singapore. It can also be an excellent means for startups to incentivize employees and also helps with hiring needs. It can also be used successfully by an organization to its benefit and the benefit of the employees.

However, because its structure can range from simple to complex, its feasibility should be examined by competent lawyers, accountants, and administrators. This also ensures tax compliance and appropriate legalities are taken care of.

If you decide to roll out ESOPs for your employees and you would like help to digitize your equity stack, get in touch with us.