About a year has passed since Shoji Miyata, founder of SmartHR, a unicorn company that provides personnel and labor software, announced his retirement as CEO of the company. Mr. Miyata has newly launched “Nstock” and is preparing SaaS and Fintech services related to stock compensation.
We asked about the history of the company’s speedy start-up, which took just four months from idea to founding, the issues with stock options (stock acquisition rights, hereinafter SO) in Japan, and how SOs are used to take advantage of the recession.
Starting a business in 4 months from posting on Slack
Mr. Shoji Miyata, CEO of Nstock. Launched a startup related to stock compensation and also worked hard to lobby for legal reform.
Nstock is a wholly owned subsidiary of SmartHR. In September 2021, SmartHR’s in-house Slack was the catalyst for the founding of a new business, “Wouldn’t it be interesting to have a SaaS that manages the sale of SO?”The thread was lively, ranging from problems related to SO to SaaS that solves them and specific examples of financial business to monetize that SaaS.120+ repliesIt is said that the
The author of the post was Mr. Masaomi Takahashi, an executive officer of SmartHR at the time and co-founder of the current Nstock. After that, Mr. Miyata and Mr. Takahashi brushed up the business idea from October to November, and after approval at the SmartHR board meeting in December, “Nstock” was born in January 2022.
Stock-based compensation for employees has increased over the years.
“I had decided to retire as president around the summer of 2021, so it was a time when I was wondering what to do next. I’m a director of SmartHR, but without this idea, I might have been an ‘in-house NEET’ (laughs).” (Mr. Miyata)
It was originally proposed as a new function of SmartHR, but it was “too deep to dig into as a single function,” and “if you’re also doing financial business, a separate company would be more beneficial.” It is said that
Advertisements
An SO that does not turn into “waste paper” due to retirement or M&A
“KIQS” can be used free of charge. There were about 300 downloads on the first day of release.
Ahead of the full-scale rollout of the service, Nstock recently released a tax-qualified SO contract model “KIQS.”
(1)Retirement before IPO (initial public offering) does not expire(possible)
(2)It will not be confiscated by the company even if it is M&A (Merger / Acquisition)(possible)
(3)Vesting (gradual vesting) conditions start from the date of joining the company, not the date of listing
And so on, it has a fairly strong message that overturns the customs of SO in Japan and raises issues.
First (1), the company can freely determine the conditions for exercising the SO, and if the employee leaves the company before the IPO, the right is often forfeited. I would like you to refer to the past article for details, but because of this condition, people who do not fit the phase of the company stay until listing, and the competitiveness of recruitment decreases, and the mobility of human resources is hindered. Mr. Miyata points out that this is not the case.
“SmartHR has nearly 750 employeesbut actuallyNo one has started a startup after retirement at the momentWhat is it? I would be happy if you think that work is fun,“SO’s holding power”is too strong. SmartHR’s SOs were designed by me in the early days without sufficient knowledge, so unfortunately most SOs expire after retirement.
After all, it is human to want to quit after exercising SO and converting it to stock and cashing it.
If it was an SO that could be exercised even if I retired before IPO, it would be like SmartHRStarting from a late-stage startuporRe-dive into Seed/Early Stage StartupsI think the number of people will increase.They are the so-called“Second-round talent”is.Strengthen the startup ecosystemI think.” (Mr. Miyata)
Negotiations with VCs, legal barriers
A former Mercari stock compensation officer joined Nstock as a domain expert and is also in charge of drafting KIQS.
(2) Handling at the time of M&A is also important. M&A is becoming more and more important as an exit strategy other than going public, and the government is considering giving tax incentives to large companies that are potential buyers.
However, according to Mr. Miyata, it is not uncommon for companies to confiscate SOs from their employees if the company is acquired. Is this practice too painful for employees to look out for buyers?
“No, I don’t think so.Exercise SO to convert to shares and negotiate with the buyer company to include that amount in the acquisition priceI just have to do it.
BasicallyIssues with existing shareholders of the selling companyWhat is it? Of course, if SO is converted to stock, the value per share will be diluted, so we need to make adjustments to get VCs to accept that.” (Mr. Miyata)
Even after overcoming these conditions, there are legal barriers. that is”Storage consignment obligation”is.
In order to make use of tax-qualified SOs at the time of M&A, it is necessary to exercise them and convert them into shares, but in order for an unlisted startup to realize this,Issue real stock certificates and secure securities companies that store themThere is a need. If you were to issue 1 million shares of SO, you would need a securities company to manage a large number of stock certificates.Brokerage firms that have publicly announced that they will undertake this cumbersome task1 company in JapanThis is also a major reason why SO cannot be maintained during M&A.
Lobbying for tax reform
“SOs face a variety of issues, but there are also many legal issues, such as storage consignment obligations, that we absolutely cannot solve on our own.I also do my best in lobbying activities.(Mr. Miyata)
In response to the Kishida administration’s efforts to support startups, Mr. Miyata and other Nstock members have cooperated with hearings from the Liberal Democratic Party’s subcommittee, the Ministry of Economy, Trade and Industry, and the Cabinet Office, and have continued to raise issues.
Perhaps because of this, the government compiled on November 28″Startup development 5-year plan”also incorporates environmental improvements for SOs.In addition to the above-mentioned elimination of the storage consignment obligation, there is another major issue that Mr. Miyata feels is a major issue.Extension of “exercise period”was also proposed.
Part of the reason for the “small IPO” is the SO
The government plans to revise the tax system to make SO easier to use. Details such as how long the exercise period will be extended will be discussed later.
Current tax-qualified SO from date of grant resolutionAfter 2 years and within 10 yearsI have to exercise it for a long time, but I’m trying to stretch this.
“Currently”Listed within 10 years”It’s like they say. SmartHR will be 10 years old next year, but I feel that 10 years is too short to aim for a large-scale listing. Fortunately, our tax-qualified SO was launched after we started the SmartHR business (since 2015), so we have a little time to spare,There are quite a few companies that rush to go public because they have to let their employees exercise their SO.I think.
If you can extend this for 5 years, it’s really big.”Small IPO”IPOs in Japan are sometimes ridiculed as such, but if this is improved, there should be an increase in the number of unlisted companies that stick around until they reach a market capitalization of 100 billion yen or more.” (Mr. Miyata)
Who are the “besting conditions” for?
Note, which is expected to be down-listed, issued its first SO in 2013, and some speculate that the approaching deadline for its exercise may be the reason for listing at this timing.
The besting conditions of (3) also assume the flow of startups that take a long time to go public and grow in size.What is vestingRestrictions so that SO rights can only be exercised in stages, such as “X% of SOs can be exercised in X years after listing”It’s what you do. In other words, it can be said that it is a company’s measure to keep employees for a certain period of time so that employees who have been granted SO do not exercise their rights in a short period of time after listing.
However, in KIQS, this starting point is based on Japanese customs.After “joining the company”, not after “listing”made it It is based on the idea that SOs, which take more than 10 years to go public and then several more years until all SOs can be exercised, cannot be competitive in terms of recruiting talent.
Is SO attractive in the “startup winter era”?
On the other hand, I’m curious, is SO attractive as a reward in the “startup winter era” when the economy is cold? That’s the point. Down-round listings on the Tokyo Stock Exchange growth market are continuing. Down-round funding is likely to increase in the future.
In the U.S., where the secondary market for unlisted stocks is well-developed, there are reports that employees are increasingly selling SOs due to the recent recession.
“You can also take advantage of low stock prices to increase future capital gains”
Mr. Miyata who speaks. SO’s exercise price is basically linked to the company’s corporate value. Suppose that SO was issued at a high valuation in the past, for example, with a market capitalization of 30 billion yen, but was raised at 20 billion yen due to a downturn this year due to the recession. In that case,Cancel the SO with the past high stock price (30 billion yen) and reissue it with the current low stock price (20 billion yen)be able to.
Valuations can be highly influenced by market conditions, regardless of business value.Just as listed companies “repurchase their own shares” to resist low stock prices, private startups should take advantage of the current market conditions to figure out what to do.It is said that
The company issues up to 20%, CEO 0.1%
Now that we’ve heard Nstock’s thoughts on SO, many of you may be wondering what kind of SO the company plans to issue.
as mentioned aboveSO has not yet been issued in anticipation of tax reform (extension of exercise period, etc.)However, it is said that the content will likely be something “unconventional” that combines tax-qualified SOs using KIQS and trust-type SOs.
Regarding the SO ratio in the total number of shares, it is customary to keep around 10%,”Issuance up to 20% according to business growth”I plan to.
I didn’t intend to give SO to Mr. Miyata himself, but
“If you don’t have anything, won’t your interests match the company? That’s what co-founder Takahashi told me (laughs).about 0.1%I’m going to have
I myself own shares in SmartHR, so I want employees to hold as many of the 20% quota as possible.in additionA system that allows decisions to be made based on what is right rather than who is rightalso to makeYou don’t need a lot of stock as a founderThat’s the idea.” (Mr. Miyata)
The key to transform SO from a “lottery” to a “reward”
Nstock disseminates information related to stock compensation in its owned media “Stock Journal”. The story of the founder’s stock sale attracted a great deal of attention.
Nstock is currently preparing a SaaS that facilitates stock compensation practices such as paper, printing, seals, faxes, and mail, where DX is lagging behind. We are planning to handle multiple financial businesses and are considering it.Financial business is Nstock’s growth acceleratorIt is said that it will be
Carta, which offers a similar stock compensation management tool in the US, also operates a secondary trading platform for private equity (CartaX). The secondary market in the country is booming, with over $2.5 trillion in stocks under management and $13 billion individually returned through secondary trading, according to Carta’s CEO.
Expanding the secondary market is also important for startup growth. Carta has also sold its own shares on CartaX and succeeded in raising the valuation significantly from the latest funding.
Stock liquidity is organizational liquidity. In order for stock compensation such as SO to function in Japan, it is expected that the secondary market for unlisted stocks will thrive.
“I think it would be better if there were a secondary market for unlisted stocks in Japan as well. Most of the cases are sold to
If this becomes possible for employees to exercise their SOs while they are unlisted and convert them into shares and sell them, the liquidity will be very high. SO to “Big lottery if you winFrom the treatment like”Reward”I think you will be able to think that it is.
There are problems with systems and customs, as well as the lack of players in the secondary market for unlisted stocks, so it seems like we have a long way to go.” (Mr. Miyata)
Will the stock compensation reform that Nstock is challenging become a catalyst for the promotion of Japanese startups?
Source: BusinessInsider
Emma Warren is a well-known author and market analyst who writes for 24 news breaker. She is an expert in her field and her articles provide readers with insightful and informative analysis on the latest market trends and developments. With a keen understanding of the economy and a talent for explaining complex issues in an easy-to-understand manner, Emma’s writing is a must-read for anyone interested in staying up-to-date on the latest market news.