Photograph — The Street

Ever heard the name, David Choe? If you haven’t, let me tell you a little about him. Choe is a painter who made one of the most historical deals in modern business. In 2005, after Sean Parker became president of the then-fledgling Facebook, he hired Choe to deck out its original headquarters in Silicon Valley with murals. Parker offered him a choice between cash and company stock but advised him to take the stock. Choe thought the Facebook business model was “ridiculous and pointless”, but he took the company stock as payment for the murals instead of cash.

On the eve of Facebook’s 2012 Initial Public Offering (IPO), Choe’s shares were worth approximately $200 million. Had he held the shares without liquidating them, they’d be worth more than $1.3 billion. Like Choe, many others have become wealthy by getting paid in stock options. After Google launched its IPO in 2004, about 1000 employees became millionaires. The story is the same for many former employees of LinkedIn, Uber and Slack. Microsoft’s IPO in 1986 created three billionaires and approximately 12,000 millionaires among its employees.

Cash is king in Nigeria.

Technology is quickly gaining strength in Nigeria’s economy. Some have even referred to tech as “Nigeria’s new oil”. However, tech talent is still scarce in Nigeria. While the scarcity problem remains, it should make bargaining ownership stakes easy for the few available. But equity does not seem as desirable in Nigeria. A survey by Ventures Africa showed that 80 per cent of tech workers prefer cash to stock options.

James Onuh, a UI/UX designer, believes that stock options should just be added benefits. “Stock options are not bad, but the cash is more important,” he said. “You can’t predict how long it will take them to become profitable, or if they ever will.” James is not wrong with this sentiment. A recent study showed that Nigeria has the highest rate of startup failure in Africa. Also, stock options are not as straightforward as Choe’s in the Facebook story. They take time to turn into anything concrete. For employees, there are several steps to go through before receiving the full benefit of the stock options. 

First, the employer has to grant the options to the employee by setting up the share options plan. This step allows employees to participate in the ownership of the company. In some cases, the employer may offer to ‘pay in equity’ by reallocating a portion of the employee’s income to the acquisition of discounted company shares. For instance, an employer may offer a monthly N250,000 benefit package to an employee, but only pay N150,000 in cash. The remaining N100,000 would be used to purchase company shares on behalf of the employee at an agreed price. For the duration of employment, the employee would accumulate shares in the company.

However, most employee stock option plans (ESOP) will also require the worker to display some loyalty to the company by working for a fixed period. In these instances, an employee will be entitled to, but will not receive the shares, until a certain period has elapsed. This is the second stage, and it is known as vesting. Until this happens, the employee does not have a right to exercise his option – or cash out. But ESOP plans are not common among Nigerian companies and startups.

Another reason employees do not value equity is that they can only really benefit in the final stage of the equity process. They have to be able to buy and then sell the shares to willing buyers. However, in Nigeria, there are not many opportunities for an employee to sell their newly acquired shares, either privately or publicly.

Trust before stocks.

In our survey, some tech talents admitted they could work for equity. However, they would only make those exceptions on the ground of trust. Israel Agom, a software developer, says only people with proven integrity can get that kind of commitment from him. “I can only take that option if I have a relationship with that person (founder). For me to trust him that much, I must have seen his work ethic. When there’s no immediate financial reward, it’s risky. I need to know if they (the founder) are worth it”.

The “Choe model” is unlikely to work in the Nigerian ecosystem. Why? Nigeria is a low trust society. Most startups do not even promise equity with legal backing, so it’s hard to accept it. Even signing documents does not take away the risk of getting exploited. 

Greener pasture

Many Nigerian startups offer employees equity that vest over time, often ranging from six months to four years. This means employees have to work for the company for up to four years before receiving the shares. However, many employees do not bother to wait until vesting before leaving the company. Bigger paychecks wipe off the appeal of equity for Nigerian talents.

On the bright side, the grass may be getting greener soon. The Nigerian Exchange recently announced plans to review its IPO rules to attract tech unicorns. IPO announcements for tech unicorns such as Flutterwave and OPay might be the watershed moment to make equity more appealing to tech talents.

Written by Oluwatosin Ogunjuyigbe

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