Newrlis based in Bengaluru Challenge( decentralized finance) startup that offers a new solution to provide liquidity to ESOPs of unlisted companies.
- With the startup boom in India, ESOPs are more popular than ever as a way to attract and retain talent.
- We met the founder of the company,
Swapnil Pawarto understand Newrl Tokenized ESOPservice work, and more.
Employee Stock Ownership Plans, also known as ESOPs, are a lucrative way to motivate employees and retain quality talent. For businesses, ESOPs are a great way to reward employees while minimizing cash flow, which is a win-win for both parties involved.
But one of the problems with ESOPs is that they are not liquid. So for employees, although they are rewarded for their contributions, they cannot cash out until their options vest, or if they resign or are fired before vesting, their rewards are wasted.
This is where Newrl comes in – the Bengaluru-based company founded in 2019 by Swapnil Pawar has found a solution to bring liquidity to ESOPs, benefiting employees and giving businesses an additional opportunity to make their ESOPs more lucrative than ‘previously.
Early investors include Manish Agarwal of Nazara Technologies, Jasmeet Singh Gandhi, head of global business development at Clevertap, and Uday Sodhi, former head of SonyLiv.
It should be noted that tokenization
What are Newrl tokenized ESOPs?
The idea behind Newrl’s tokenization of ESOPs is simple: make them tradable so employees who need money or want to cash out can do so. Those who want to buy shares of an unlisted company can profit by buying those options from those who want to sell – this creates a market for ESOPs for unlisted companies, which are generally illiquid.
We caught up with the company’s founder, Swapnil Pawar, to understand the idea behind Newrl, the need to tokenize ESOPs, and the concerns the company faced before launching this new service.
Q. Before we begin, give us a brief overview of tokenized ESOPs.
A. The general idea of tokenized ESOPs is to improve the liquidity of the underlying stock and therefore make ESOPs valuable.
Q. How will these tokenized ESOPs work? Will they be tokenized when granted, or is there a separate process for employees to complete?
A. We expect ESOPs to be transformed into smart contracts upon grant. When they are acquired, the exercise period begins and during the exercise period, if the contract is called with adequate proof of payment, the execution of the transfer of the action tokens to the employee is automated and decentralized.
Primarily, Pawar explained that the goal is to improve the liquidity of ESOPs before they vest, in case employees want to cash in before those options vest.
Q. So when can employees cash in their ESOPs?
A. Pawar explained that he expects there are three options that businesses signing up for the service could choose from:
- Restricted Transfer of ESOPs Until Vested – this is similar to restrictions on ESOPs even now. The only advantage of this is that the options are tokenized and there is transparency in this process.
- Limited restrictions on ESOPs – it will entail restrictions on the transfer of ESOPs to specific individuals on the company’s whitelist, primarily to ensure the protection of company ownership.
- Freely transferable ESOPs – this will not imply any restrictions on the transfer of ESOPs.
Basically, the ability to profit from ESOPs will be decided by the companies that sign up for the service.
Q. How does this benefit businesses that sign up for tokenized ESOPs?
A. Companies that sign up for this service can reduce their cash outflow and thereby use ESOP grants to compensate advisors, directors, acquisitions, and other use cases.
“So the general improvement of being able to raise funds, pay employees, get collaborations like advisors, everything becomes a lot more versatile for an unlisted company or a startup,” Pawar explained.
Q. What about regulatory concerns, how are you going at Newrl to resolve this issue?
A. “So we took a very detailed legal opinion, spent a lot of money and time on it, we came to the following conclusion that Indian context actions can only exist as a demat now,” Pawar explained.
“And the Registrar of Companies (ROC) has no major restrictions beyond that, Shareholders’ Agreements (SHA) are entirely the prerogative of the company, only the articles of association need to have an article or section to specifically mention tokenization,” he added.
Regarding legality, Pawar explained that the Information Technology Act and Indian Contracts Act recognize smart contracts and tokenized ESOPs are considered smart contracts. This makes them legally enforceable.
Q. What other challenges might tokenized ESOPs face?
A. “There is a 30% digital tax on any capital gains on digital assets, which sometimes proves costly,” Pawar added, saying the popularity of tokenized ESOPs will depend on how easy they are to access.
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