What are Stock Appreciation Rights (SARs)?

Wish you a very happy Holi and hope you had a good one. In this edition, we will be talking about Stock Appreciation Rights (SAR), one of the remuneration schemes for employees which are getting popular these days.

SARs are a way for businesses to reward the management or employees with a bonus if they perform financially well. Under the SAR’s scheme, an employee does not receive any shares but is instantly entitled to a stake in the company’s growth and the right to compensation equal to a rise in the price of the company’s common stock over a base price. For instance, a worker with one stock and a $15 exercise price for stock appreciation rights could exercise those options at $20 and receive $5. The employer makes a payment to the employee in the form of cash or equivalent stock awards.

SARs are a way for companies to motivate employees to be more productive. With SARs, an employee receives a percentage of the company’s ownership. As a result, if the company’s shares rise in value, their share value rises as well. Hence, SARs are a method of establishing a loyal partnership with employees.

A notable benefit of SARs is that there is a minimum cash outflow from the employer side. An employee receives the shares without having to pay for the cost of the shares. And the greatest benefit of SARs is they are flexible. Companies can design their SARs in a way that best suits the needs of various people. The amount of these bonuses, the liquidity of the SARs, and the vesting procedures can all be determined by the company. Despite their many benefits, SARs are a high-risk form of employee compensation. If the company’s stock does not appreciate, SARs often expire worthless.

With SARS, you don’t need to buy shares of stock to benefit from an increase in the stock’s value. On the other hand, Employee stock options (ESOPs) require you to exercise your right to buy company stock in order to profit from any appreciation. So, cash outgo is required in order to exercise ESOPs but no cash outgo is required for SARs.

At ESV, we help create the startup a business model in a way that is advantageous to both the entrepreneur and fellow team members. SARs is also a better way to take advisory equity and we are exploring that with our portfolio companies.

Ecosystem Ventures This Week

Key Highlights – Events

We are pleased to announce that Mr. Abhishek Sanghvi (Partner, Ecosystem Ventures) has participated in a panel discussion on “Catalyzing Digital transformation in smaller cities and new cities” at MeitY Startup Hub event, held in AIC Prestige Institute, Indore.

Startup Funding Summary

Mintifi, Mumbai-based supply chain financing platform, has raised $110 Mn in Series D funding from Premji Invest, orwest Venture Partners, Elevation Capital and International Finance Corporation – Read More

Fantasy Akhada, Gurgaon-based fantasy gaming platform, has raised $11 Mn in a funding from Florintree Advisors, Mukul Agrawal and Varalakshmi Enterprises – Read More

Bira 91, New Delhi-based premium beer company, has raised $10 Mn in a funding from MUFG Bank – Read More

GIVA, Bangalore-based jewellery startup, has raised $5 Mn in a funding from Alteria Capital – Read More

Off Duty, Mumbai-based apparel and fashion brand, has raised $500 K in a funding round from Angel Investors – Read More