Want to retain talent? Why not offer stock options

Illustration: TBS

Bangladesh's startup ecosystem has experienced remarkable growth in the past decade. Successful startups like bKash, ShopUp, and Pathao have emerged during this phase and have drawn significant attention and investment from international investors. 

However, despite this progress, brain drain continues to be a major problem for Bangladesh. Most young people express a desire to leave the country in search of greater economic stability and opportunity. 

Under these circumstances, Employee Stock Option Plans (ESOPs) have emerged as a promising solution to retain top talent and reduce the negative impact of brain drain. ESOPs allow employees to own shares in the company they work for, creating a sense of ownership and motivation to contribute to the company's success. 

ESOPs also lead to improved employee productivity, job satisfaction, and creativity. Ultimately leading to better business outcomes. This concept is gaining popularity among startups globally as a beneficial scheme to motivate and retain employees.

Stock options for employees were traditionally used to reward senior employees, but now they have become a popular compensation and motivational tool for startups who cannot afford to pay high salaries in the beginning stages. 

ESOPs allow eligible employees to purchase company shares at a predetermined price. But the options are subject to certain conditions known as "vesting criteria". Once these criteria are fulfilled, the options can be converted to shares by paying exercise price. The shares received on exercise of the option are subject to certain restrictions, such as a lock-in period, and the option holder is not entitled to voting or dividend rights until the option is exercised. The option cannot be transferred, but in the event of an employee's death, their legal heirs may exercise the vested option.

Section 58 (2) of The Companies Act, 1994, which is based on the capital maintenance doctrine,  prohibits public companies from providing financial assistance for buying their own shares, which restricts their ability to implement ESOPs. 

Private companies, however, can provide financial assistance to employees for share acquisition and face no restrictions in implementing them. In this context, Section 62 (1) of the New Zealand Companies Act, 1955 and section 58 (2) of the Companies Act, 1994 are similar in nature and they both prohibit a company from providing financial assistance to any individual for the purpose of purchasing or subscribing to its own shares. 

The New Zealand Court of Appeal in the NZl Bank Ltd vs. Euro-National Corporation Ltd (1992) case narrowly interpreted Section 62 (1) and concluded that providing financial assistance for options to acquire shares did not violate the provision. 

The court's reasoning was that the provision aimed to prevent direct acquisition of shares, and an option to acquire shares was different from actual purchase or subscription of shares. So, it is unclear whether a public company can implement ESOPs in Bangladesh, as there is no existing case law on the matter. 

However, under rule 4(1)(l) of the Bangladesh Securities and Exchange Commission (Public Issue) Rules, 2015, Bangladesh Securities and Exchange Commission (BSEC) may allow a publicly listed company to offer up to 15% of their IPO to employees through a private offer at par or fair value.  

ESOPs can be implemented through direct or trust route, where the scheme or deed of the ESOP determines the mechanism to purchase or subscribe to company shares. In the direct route, stock options are granted to employees to purchase shares while in the trust route, the company may advance a loan to the trust to acquire company shares and transfer them to ESOPs, which can be repaid once the employee exercises the option.

This method is very useful for early-stage and bootstrapped startups to attract and retain top talent by offering company shares with vesting schedules. 

They provide flexibility during tough times by offsetting pay cuts with share offerings to boost morale of the employee. They also promote a sense of shared responsibility and accountability, leading to increased productivity and collaboration. Furthermore, they also serve as a succession plan and offer legacy protection during ownership transitions. 

ESOPs may pose some challenges for startup employers. Offering equity through an ESOP may dilute the ownership stake of existing shareholders, including founders. The administrative and legal costs of establishing and maintaining an ESOP may also be significant. 

Again, it may create a sense of entitlement among employees who may overvalue their equity stake and may be complicated to terminate during mergers or acquisitions. Finally, it may limit the flexibility of a company's capital structure, making it more challenging to raise capital in the future. 

However, these difficulties can be overcome with good ESOP implementation.

Bangladesh is witnessing a startup revolution with companies like Bkash, Pathao, Chaldal, Shohoz, Daraz, and 10 Minute School etc creating over 1.5 million job opportunities. Implementing  ESOPs in startups can be an effective way to retain top talent and reduce brain drain by providing better opportunities in Bangladesh. 

Neighbouring India has recognised ESOPs in various legislations and provided proper guidelines for their implementation. Therefore, ESOPs can be implemented in Bangladesh by adopting the concept and offering tax incentives through a distinct subordinate legislation or by amending existing laws. Promoting ESOPs can create a startup-friendly environment that will benefit the country's economy in the long run.

The writer is an intern for the research wing at AS & Associates and a final year LLB student at the University of Dhaka