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Employee stock ownership has arrived on Africa’s startup scene

A man and a tuk-tuk.
Sokowatch
Sokowatch gives employees ownership interest in the startup.
  • Carlos Mureithi
By Carlos Mureithi

East Africa correspondent

Published Last updated on

Finding, attracting, and retaining top talent is a big challenge for tech startups in Africa.

In the early years of Sokowatch, an e-commerce platform for informal retailers in Kenya, Tanzania, Rwanda, and Uganda, founder and CEO Daniel Yu wanted to find a way around this. A software developer originally from California, he understood the tech ecosystem in Silicon Valley, where he says talented people frequently leave big companies to work for small startups, with employee stock ownership plans serving as a major draw.

“How do we get people to leave jobs at Safaricom or at other big or multinational companies to work for small startups? It’s gotta be because they see something in it for themselves,” he says.

What’s an employee stock ownership plan?

Employee stock ownership plans are uncommon at African startups, where a common arrangement is for only founders and some top executives to have equity in their companies. But as more startups attract funding, increase their valuations and grow into giants, questions are emerging about equity and fairness and how much of these benefits flow back to employees building the startups.

Sokowatch established its employee stock ownership plan in 2018, and it now covers more than 500 employees.

Upon hiring, Sokowatch gives full-time employees an offer package that includes stock options, indicating equity ownership depending on their position. The options fully vest in four years with a one-year “cliff,” meaning employees must stay at Sokowatch for 12 months before they can exercise any options. After this period, they get their first-year portion, plus more options monthly over the next three years. If an employee leaves the company, they can still hold on to their options.

The secondary market for employee stock options

After the first year, employees can sell their stock options through a secondary sale, whereby existing Sokowatch investors can purchase the shares from the employees.

The ability to do a secondary sale makes the stock ownership plan feel “real” for the company’s employees, Yu says. “When people see ‘Oh wow! I sold a few thousand shares and I got hundreds of thousands of shillings or in some cases even millions of shillings for the shares that I was able to sell,’ it makes a huge impact and it makes them value [it] and say ‘Wow, this is really real,’” says Yu.

Sokowatch is an e-commerce platform for informal retailers.

Yusuph Khatibu, the field manager for Sokowatch’s Tanzanian operation, sold some of his stock options last year to finish constructing a house where he now lives with his family. He previously worked at a Kenyan advertising company, which didn’t have an employee stock ownership plan.

Khatibu says the Sokowatch scheme makes him feel appreciated and recognized for his work, and boosts his morale. “You really feel the ownership and also the belonging,” he says. “You feel like you are totally part and parcel of the company.”

A supportive corporate culture helps

Joseph Blasi, a professor and director of the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University, says employee stock ownership plans are important because they can make it easier to recruit and retain employees and get more creative employee innovation. They’re often associated with reduced turnover and better financial performance, he adds.

These advantages, however, are dependent on the companies having a supportive corporate culture, he says, including training employees to be able to solve company problems, and adequately ensuring a sense of job security among workers.

Employee stock ownership plans are important for African startups because “Africa has a whole future of new startups, and tech startups, and innovative corporate startups in front of it,” he says.

A development that’s catching on

AJ Okereke, a partner at Golden Palm Investments, an Accra-based venture capital firm, says although employee stock ownership plans are relatively new in Africa, they’re starting to catch on. Golden Palm was an early investor in Sokowatch, and it participated in the company’s secondary market last year by purchasing employee shares.

Sokowatch’s Yu says the company’s employee stock ownership plan helped it retain 98% of its staff last year, and he hopes the schemes can expand in the African tech industry.

“I believe that, if we want to build a striving tech eco-system in Africa, then we have to bring these concepts of equity and shared ownership to the ecosystem on the continent,” he says.

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