Stock Options in Japan: Here's the Latest [Apr 2024]

If you’ve ever been on a job hunt, you’ve likely come across the term “employee stock options”. 

Stock option plans can be a great way to incentivize employee contribution and they’re an often utilized perk among companies that want to attract new, eager talent. 

So, is having stock options at your company as good as it seems, or is there a catch most people fail to realize? 

In this post, I’ll explain what employee stock options are and how they’re used in Japan. I’ll also go over the pros and cons of having employee stock options in Japan.

First, let’s talk about what "stock options" actually are.

What Is an Employee Stock Option Plan?

In the simplest possible terms, stock options refer to the right to buy company stock. Emphasis on the “right” here, as having a stock option doesn’t automatically make you the owner of the shares promised.

For this reason, stock options are also referred to as stock acquisition rights, which is arguably much more accurate.

Essentially, having stock options as an employee means that you have the right to buy shares from the company at a predetermined price. 

Because it’s a right rather than a direct ownership, stock options hold no value until the right to buy the shares is exercised. 

In some cases, stock options allow the employee to make a great return on their “investments.” This usually happens when the company goes public, and its share values rise, and with that, the attractiveness of the offer.

However, is this really the case? Let’s look at the current landscape of stock option plans in Japan.

The Status of Employee Stock Options in Japan

According to a survey conducted by Amateras Startup Review, each year, about 80 to 90% of newly listed companies in Japan offer stock option plans to employees.

This trend is reflected in the rising median stock option grant ratio for these companies, which hit an all-time high of 9.4% last year.

The same research also states that the job offer-to-applicant ratio is rising, and the startup industry, in particular, is taking the lead by mainly hiring engineers. 

This suggests that startups, especially those in the tech and engineering fields, are increasingly using stock option plans to attract new talent. Consequently, the granting ratio of stock options is also rising.

What’s more, this trend seems to have caught the attention of the government as well. It was recently reported that the Japanese government is planning to ease stock option tax regulations for startups.

As startups rely more and more on the labor and talents of outsourced personnel, the government is gearing up for a more relaxed approach to tax regulations for these companies, which may extend to freelancers and other non-regular employees. 

These tax benefits, however, seem to be planned only for those who work in key positions in a company, as they’re stated to be for “those with experience as directors of unlisted companies.” Still, this will allow companies to offer stock option benefits to external personnel, which is a big step.

Previously, this was only possible in certain situations, such as having to work for at least three years at the same company. With the new regulations, an increase in the maximum amount of shares that can be bought via stock options will also be increased, which is currently 12 million JPY per year.

Employee Stock Option Plan Advantages

A major benefit that comes with being offered stock options is the unparalleled motivation they offer. Basically, owning shares at your company means that your input at work also serves your own interest. 

What’s more, owning shares this way is actually much more advantageous than buying stock yourself. As you don’t own the shares directly, your risk of incurring losses on the shares owned is much lower if the company doesn’t perform well on the stock market.

Another significant advantage is that your tax responsibilities will be significantly lower in the long run. 

Unlike regular stocks, profits from the stock options you own as an employee are taxed differently. Even though this depends on the specific nature of the stock option offered by your company, in many cases, you’ll have tax benefits that wouldn’t otherwise be available to you. 

Considering all this, it’s easy to see why stock options are attractive for employees and prospective candidates. And they can be even more beneficial if offered by a venture capital firm. 

Stock Options at Venture Capital Companies

Just as it’s considered risky to invest in a startup or venture capital company, it may also feel risky to be employed by one. 

However, working at a venture capital firm with stock options certainly has its own benefits.

For one, stock options offer employees and company executives the right to buy shares of the company at a predetermined price. Usually, the predetermined stock prices at venture capital firms are set at the market value at the time the company applies for a grant.

This means that employees can sell their stock options for much higher prices than the initial price they purchased them. And those who sell their shares when the company’s stocks skyrocket due to going public, a.k.a IPO (initial public offering), can significantly profit on their investments, to say the least.

The Stage at Which You Acquire the Stock Matters the Most

If you become a founding member of a startup that’s in its initial stages, you’ll likely receive more stocks than you would at another company as there are a smaller number of people involved. 

It’s simple math: normally, companies issue 10 to 15% of their total number of shares as stock options. If there are too many people involved, there will be too many stock options issued.

This means that their value won’t be as high, especially as the company goes through its growth phases. 

Once the founding, or the seed stage, is over, the number of employees increases accordingly. In the following phases, even more people join. 

Here’s what the stock grant rates look like per person in each stage (based on data from startups that IPOed from 2020 to 2022):

As you see, there’s a real exponential decrease. To maximize your profits, you’re definitely better off joining in the first couple of phases if a promising opportunity arises.

Further Improvements Planned for 2024

While not an advantage just yet, the Japanese Government has been working on making further improvements to the tax system, which are expected to be finished as early as March 2024, with new regulations taking effect starting from April 2024.

According to reports, the planned revision is expected to make employee stock options even more attractive to candidates, as it will allow employees to redeem their tax-qualified stock options even if the company is unlisted, or pre-IPO.

Currently, the system doesn’t allow employees to exercise their rights effectively if the company goes through a merger or becomes a part of another company through acquisition. With the new regulations, not only will the employees be able to make capital gains from mergers and acquisitions, but startups will also have more incentives to exit through M&A.

What’s more, the plan involves another change that’s expected to make stock option plans more desirable for employees. 

Until now, companies were limited by 12 million JPY annually concerning exercising stock options. Naturally, this has resulted in increased waiting times for employees who are in line to exercise their rights, which soured the idea of stock options for many.

According to the same report, however, the government is now planning to increase the exercise limits of companies from 12 million JPY to 36 million JPY. This will, hopefully, decrease the waiting times for those who are on the waitlist to exercise their stock options. Overall, the changes will, no doubt, make it easier for scarce second-round startup personnel to take on new challenges.

Disadvantages (or Risks) of Employee Stock Options

As you can see, having stock options as an employee has its benefits. Still, every rose has its thorns, and like many things in life, stock options come with a side of risks, or potential disadvantages.

Maybe the most obvious one comes from the fact that having stock options makes you emotionally invested in the company’s success. While this can be a great motivator, it can also demotivate you if things go awry and the company begins to underperform.

It’s always good to remember that having the right to own shares is just as much of an investment as it is directly investing in a startup. You should always do your due diligence and make sure that the company shows promise before you decide to take up any offers.

Reading the Fine Print: Conditional Stock Options Exist

Another risk that may potentially put you at a disadvantage when it comes to stock option plans stems from not reading the fine print.

It may just be the attractive nature of the offer, but candidates often fail to realize that there are special conditions attached when they’re offered a stock option plan. 

Some of these conditions may be hidden in the fine print in your contract, or they may be brushed over during negotiations, but they have the power to render most of the advantages of owning stock options as an employee at a particular company irrelevant. 

For instance, some companies offer stock options with a waiting period that prevents the grantee from reaping the benefits. This is referred to as a vesting schedule.

A vesting schedule can keep you from exercising your right to the stock options for a set period of time, or benefits may be “unlocked” gradually for each year the employee stays at the company.

Also, in some cases, stock options may be offered on the basis of the employee not exercising their right to sell until a certain period passes after the company goes public. This condition is set with the idea that the company will eventually go public, which is arguably when the company stocks gain value the most.

A Stock Option Plan Isn’t a “Get-Rich-Quick” Scheme

As an employee, the idea of having stock options at your company may sound attractive in many ways. It allows you to form an emotional connection to your job as you may feel that your interest is directly affected by your input.

But a stock option plan is, by no means, a get-rich-quick scheme.

Yes, it may initially feel tempting to take up an offer because of it. However, I would strongly advise against basing your decision on the potential monetary return from the stocks offered. 

Right now, startups are in a tough spot and the probability of survival for startups in the first 10 years is around 4 to 5%. These numbers don’t really scream “opportunity.”

Besides, basing your success on the probability of the company exiting or going IPO and expecting millions out of your stock options is not just a tough bet, but it’s flat-out gambling with your future. 

So, I advise looking at stock options as a bonus and not a reason for joining a startup. You’ll be much better off choosing a company that you believe in, and if the company succeeds, you’ll have a neat option to make a return on your “investment.”

About The State of Restricted Stock Units (RSU) in Japan

A term that often comes up when discussing stock options is Restricted Stock Units, or “RSU” for short. So, before I wrap up, I’d like to say a few words about it.

Essentially, RSUs are a specific type of stock compensation commonly used in the United States and in many European countries. 

While not as common, these also exist in Japan and are called “Jouken-tsuki-Kabu-shiki-Unit (譲渡制限付株式ユニット).” 

In the past, some well-known, listed Japanese companies, such as Rakuten and Sony, have introduced RSUs. One of the biggest names in Japan’s startup history and the country’s first unicorn startup Mercari also introduced an RSU program and ran it for several years. However, they ultimately stopped the program and went back to stock options.

This was largely due to Japanese laws being very strict, making it difficult to introduce RSUs. So, as of November 2023, RSUs are not as widespread in Japan as they are in Europe and in the United States.

That being said, Prime Minister Kishida’s “Startup Development Five-Year Plan” aims to provide financial support for start-ups and promote legal reforms to incentivize the use of stock options and RSUs in the country.

Judging by this, future amendments to the law will likely make it easier to introduce RSUs in Japan and design optimal incentives considering the timing of joining a company, performance evaluation, and grant timing for new executives and employees.

While this is it for stock option plans in Japan, you may want to know which companies currently offer stock option systems to their employees. So, make sure to head on over to my post where I introduce some of the best companies offering stock option plans in Japan.

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