Meet Newrl, the DeFi startup trying to make it easier for you to cash in on your lucrative ESOPs

• Newrl is a Bengaluru-based DeFi (decentralised finance) startup that has come out with a new solution for bringing liquidity to ESOPs of unlisted companies.
• With the startup boom in India, ESOPs are more popular than ever before as a means to attract and retain talent.
• We caught up with the company’s founder, Swapnil Pawar, to understand Newrl’s tokenised ESOP service works, and more.

Employee stock ownership plans, also known as ESOPs, are a lucrative way of motivating employees and retaining quality talent. For companies, ESOPs are a great way to reward employees while minimising cash flow, which is a win-win for both the parties involved.

But one of the issues with ESOPs is that they are not liquid. So, for employees, while they get rewarded for their contributions, they cannot cash out until their options are vested, or if they quit 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 come up with a solution to bring liquidity to ESOPs, benefiting employees and giving companies an added avenue to make their ESOPs more lucrative than before.

Some of the early-stage investors include Manish Agarwal of Nazara Technologies, Jasmeet Singh Gandhi, head of global business development at Clevertap, and Uday Sodhi, ex-head of SonyLiv.

It is worth noting that the tokenised ESOP service is still in the testing phase. Newrl expects it to come out of testing some time in May this year.

What are Newrl’s tokenised ESOPs?

The idea with Newrl’s tokenisation of ESOPs is straightforward – make them tradable so that the employees who need the money, or want to cash out, can do so. Those who want to buy shares of an unlisted company can benefit from this by buying these 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 for tokenising ESOPs and the concerns that the company had to take care of before launching this new service.

Q. Before we get started, give us a brief overview of tokenised ESOPs.

A. The broad idea with tokenised ESOPs is to improve the liquidity of the underlying stock and hence make ESOPs valuable.

Q. How will these tokenised ESOPs work? Will they be tokenised when they are granted, or is there a separate process to be done by the employees?

A. We expect ESOPs to be made into smart contracts right upon the grant. When they are vested, the exercise period begins and within the exercise period, if the contract is called with adequate proof of money being paid, the execution of transfer of share tokens to the employee is automated and decentralised.

Primarily, Pawar explained that the aim is to improve the liquidity of ESOPs before they are vested, in case employees want to cash out before these options are vested.

Q. So when can the employees cash in their ESOPs?

A. Pawar explained that he expects there to be three options that the companies signing up for this service might go for:

• Restricted transfer of ESOPs until they are vested – this is similar to the restrictions on ESOPs even now. The only benefit out of this is that the options are tokenised and there is transparency in this process.
• Limited restrictions on ESOPs – this will involve restrictions on transferring the ESOPs to specific people whitelisted by the company, primarily to ensure the ownership of the company is protected.
• Freely transferable ESOPs – this will not involve any restrictions on transfer of ESOPs.

Basically, the ability to cash in on ESOPs will be decided by the companies signing up for the service.

Q. How does this benefit the companies signing up for tokenised ESOPs?

A. Companies which sign up for this service can reduce their cash outflow, and thereby, use ESOP grants to remunerate advisors, the directors, acquisitions and other use cases.

“So, the general improvement of being able to raise money, paying employees, get collaborations like advisors, it all becomes far more versatile for an unlisted company or a startup,” Pawar explained.

Q. How about regulatory concerns, how are you at Newrl addressing this?

A. “So we have taken a very detailed legal opinion, spent an amount of money and time on it, we have concluded the following that Indian context shares can only exist in demat form now,” Pawar explained.

“And registrar of companies (ROC) has no major restrictions beyond that, shareholder’s agreements (SHA) are completely the prerogative of the company, only the Articles of Association of the company need to have an article or section to specially mention the tokenisation,” he added.

As for the legality, Pawar explained that both the Information Technology Act, and the Indian Contracts Act recognise smart contracts, and tokenised ESOPs are considered as smart contracts. This makes them legally enforceable.

Q. What are the other challenges that tokenised ESOPs might face?

A. “There is a 30% digital tax on any capital gain on digital assets, which proves costly at times,” Pawar added, saying that the popularity of tokenised ESOPs will be dependent on their ease of access.

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