Evaluating ESOPs: Questions That CXOs Should Ask
Satheesh KV, ex-HR Director at Flipkart, says in a webinar,
Deepak Abbot, former VP of Paytm, says in another webinar,
Questions on ESOPs that CXO level employees can ask during the offer stage discussion with founders:
- Valuation of the company
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 their logic and see if they are going in the right direction. Can you 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 valuation? Suppose you get offers from 2 companies. While the first company offers you 1000 options out of 1,00,000, the second offers 500 out of 10,000. In this case, the offer of the second company is worth going for. You have more skin in the game here. Also, it would help if you had clear visibility into the ESOP pool. What is the present size of the ESOP pool, and will it be diluted further in the future? These questions will help you better understand the founder’s vision.
- Comparison between offered ESOPs and the market average
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. The more successful the company, the fewer options it generally offers. This comparison will help you evaluate your potential employer’s outlook and team, culture, and rewards policies.
- 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 directly. Most companies have a policy according to which employees must 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 regarding exercise are: What if you decide to leave the company before all your options have vested? Is there a policy for accelerated vesting at the time of a merger? Can you exercise your ESOPs early? Is there a possibility of a potential buyback in the upcoming years?
- Existing fundraises
Employees should know all about the funds that the company has raised. Ask the founders directly. Ask them about the existing funding and the time until the next fundraising round. The value of your ESOPs depends on subsequent fund raíses but is also a good way to evaluate the core value and strength of the business and understand the metrics that you might be working towards.
- Roadmap and expansion plans
If you are joining a company at the CXO level, you become a key business driver. Therefore, knowing the roadmap and expansion plans is very important. Not only will you be able to align closely with the founder’s vision, but also help you understand the trajectory of your growth in the organization.
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