Best practices to give ESOPs
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ESOP for Founders

Best Practices for Strategizing & Giving Out ESOPs

It is a buoyant workforce that inks the success story of any start-up. To translate the business idea into reality, employees leave no stone unturned, and founders also 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 times, the real value of ESOPs is not appreciated. Still, if the scheme is designed and communicated properly to the team, it can get everyone aligned. Equally important is creating opportunities for liquidation at an appropriate time, reflecting the value created versus the risk taken.

Here are some basic pointers that founders should consider 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 according to the company’s financials, vision, and short and long-term goals. At the very start, ESOPs should aim at sharing ownership amongst early employees. This practice results in loyalty and creates value for employees who take the most risk in the long run. At later stages, ESOPs should be restructured to incentivize specialists (or top industry talent) to join and grow the business and 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 while giving 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 those who join later, benchmarking based on performance might be used to calibrate the allocation percentage.

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 the unit value of stocks. What do we mean? Say you gave 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 give him INR 100,000 in ESOPs. You have given Employee 2 a 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. 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. Still, 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 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 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 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 trica equity.

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 from acting 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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