It is a buoyant workforce that inks the success story of any start-up. Employees leave no stone unturned to translate the business idea into reality, and founders, at the same time, look for viable options to nurture and retain these team members. The most popular employee reward scheme is long-term incentivization through Employee Stock Option Plans or ESOPs.
Alok Bansal, a long time entrepreneur and the Co-founder and CFO of PolicyBazaar believes that ESOPs are the perfect way to compensate early teams in startups. He says, “Many a time the real value of ESOPs is not appreciated, but if the scheme is designed and communicated properly to the team, it can result in getting everyone aligned. Equally important is to create opportunities for liquidation at an appropriate time, which reflects the value created versus the risk taken.”
Here are some basic pointers that founders should keep in mind while giving out ESOPs.
- Flexibility in giving out ESOPs at different stages: The ESOP policy should be flexible, meaning that the structure of ESOPs should change in accordance with the financials, vision and short and long-term goals of the company. At the very start, ESOPs should aim at sharing ownership amongst early employees. This practice results in loyalty and creates value in the long-run for employees who took the most risk. At later stages, ESOPs should be restructured to incentivize specialists (or top industry talent) to join and grow the business as well as ensure talent retention.
- ESOPs – A just reward to drive fairness: The primary motive of ESOPs is to inculcate in team members a sense of ownership of the business as well as acknowledge stellar performance. It is, therefore, a common practice for founders to give out ESOPs to employees or talent that has outperformed over a period of time. While employees joining at the earliest stage of the start-up should be presented with a higher ESOP stake than the ones who join later, benchmarking based on performance might be used to calibrate the percentage of allocation too.
- Offering ESOPs in units & not in rupee value: ESOP has to be viewed from a long term wealth creation perspective and therefore should not be given out or allocated in rupee terms or value but in unit value of stocks. What do we mean? Say, you give INR 100,000 in ESOPs to Employee 1 on January 1, 2020, then close a fundraiser in February and have Employee 2 at a similar grade join you on March 1, 2020, and also give him INR 100,000 in ESOPs. What you have done in effect is give Employee 2 lesser stake due to his joining date; this might be seen as unfair from a longer-term rewards perspective.
Let’s take the example of Flipkart, which has been at the forefront of allocating ESOPs to employees across the organization; as far back as 2016, 40% of all Flipkart employees held ESOPs. In fact, reports suggest that the ESOP pool at Flipkart is worth well over $1.5 billion. But what makes Flipkart stand out is not just the doling out of ESOPs but the sustained focus over the years of creating ‘liquidity events’ at regular intervals for employees so that they don’t have to wait for an IPO or listing to cash out their ‘earnings’. Since 2017, when the board first approved a $100 million ESOP buyback program to put real money into the hands of employees, Flipkart has actually run annual ESOP liquidity events.
Satheesh KV, Co-founder of Spottabl and the former senior director of HR at Flipkart who worked closely with Sachin Bansal and Binny Bansal to craft and deploy the e-commerce company’s legendary ESOP policy says, “The founders were almost fanatical about giving ESOPs and ensuring that regular buyback opportunities were created to reward employees and replenish the ESOP pool so that new hires and employees across the board could benefit.”
Satheesh also adds that this annual ESOP buyback program helped employees truly value ESOPS as a reward and compensation tool instead of just looking at it as ‘paper money’.
A regular ESOP liquidity program also helps counter attrition and perhaps makes employees think twice about taking up offers from competitors.
The limited point here is that founders and HR directors need to carefully craft their ESOP policy and keep updating it to ensure that they are doing right by the employees.
If you are looking for an easy to use tool to create your ESOP policy and manage ESOPs for your team, check out MyStartupEquity
Disclaimer: This article has been prepared for general guidance on the subject matter and does not constitute professional advice. The matters described herein are general in nature and have not been evaluated based on applicable laws. You should not act upon the information contained in this note without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this note. LetsVenture Technologies Private Limited, its partners, employees, and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of LetsVenture Technologies Private Limited, this note may not be quoted in whole or in part or otherwise referred to any person or in any documents.
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