Nothing improves the financial life of an employee more than owning equity (ESOPs) in a successful startup – equity provides non-linear wealth generation and financial security.
- Employees should ask pointed questions to ensure that ESOPs are not just money on paper
- Employees should demand formal letters for all ESOP-related documentation
- Employees should ask about the size of the pool, the vesting schedule, exercise period on exit
Satheesh KV, ex-HR Director at Flipkart, says “Liquidity of ESOPs depends on the founder. But the employees should make sure that they understand the true value of ESOPs that are granted to them. What really matters is the percentage of the company that the ESOP pool represents, how long it will take to vest, and the next liquidity event.”
So, what are the questions that you can ask at the final stage of your interview?
- Present valuation of the startup and growth trajectory
Not all companies are the same. While some will become unicorns, others won’t. Asking the current valuation of your potential employer is necessary. Understand this number and ask about the roadmap. This is when you should evaluate the growth of the startup and see if they are really going in the right direction and see if you can actually generate a good profit out of your granted options?
- What percentage of the company do your ESOPs represent?
A large ESOP grant is attractive, but what percentage is that number of the total equity? Suppose you get offers from two companies. While the first company offers you 1000 options out of 1,00,000, the second offers 500 out of 10,000. You have more skin in the game in the second company but you have to ask the founder why the ESOP pool is so small? Is he or she averse to sharing equity with early team members? When will the ESOP pool be expanded? These questions will help you better understand the founder’s vision.
- ESOPs versus Cash Compensation
Some companies offer a cash component that is higher than the market average. They do this to offer fewer ESOPs. And some companies do the exact opposite. It is important for you to know this. The answer will help you understand if the company has aggressive cash or ESOP policies. This comparison will help you evaluate your potential employer’s outlook and policies on team, culture, and rewards.
- Exercising the ESOPs
When can you exercise your options? Yes, the grant letter and offer letter will have all the formal information, but ask these questions to the founders or the HR directly. Most companies have a policy according to which employees are required to exercise their options within 90 days of their departure from the company. If you don’t, your options will lapse and you can’t claim them. Know the ESOP policy well and be prepared for exercising your options beforehand!
The other questions you must ask regarding exercise are: What if you decide to leave the company before all your options have vested? Is there a policy for accelerated vesting in the time of a merger? Can you exercise your ESOPs early? Is there a possibility of a potential buyback in the upcoming years?
- ESOP Liquidity
You should know all about the funds that the company has raised. Ask the founder or HR about the existing funding and the time until the next fundraising round. The value of your ESOPs depends on subsequent fund raíses and this is a good way to evaluate the core value and strength of the business and understand the metrics that you might be working towards.
Beware of Red Flags
Asking these questions will bring in a lot of clarity. You will be able to understand and identify red flags that will further help you arrive at the decision of joining the startup. Here are two red flags:
- A small ESOP pool at an early stage startup
Founders, with a wealth-sharing motive, will always create larger ESOP pools at an early stage. If an early-stage startup has an ESOP pool that is lesser than 10% of total equity, you might reconsider your decision of joining the startup
- Formal grant letters are not issued
Ensure that a formal grant letter will be issued when you join. If ESOPs are just promised verbally, there might be a possibility that your grants will be delayed or you will face complications while completing the ESOP lifecycle
Understand the nuances of ESOPs. Click here for our comprehensive ESOP dictionary