How to create a successful ESOP plan for your early-stage startup
This blog covers essential decision-making frameworks that can help founders design a successful ESOP plan.
Rohan Kohli
In the ever-evolving landscape of startups, founders in the early stages (typically from pre-seed to Series A) are often faced with the challenge of effectively utilizing ESOP to attract top talent who typically have astronomical offers from late-stage startups. The core challenge is to strike the right balance between ESOP (Employee stock ownership plan) and cash compensation. While equity aligns employees with the company's success, it doesn't meet immediate financial needs. Founders must carefully determine the allocation of equity throughout their journey, as too little can deter talent, while excessive allocation can deplete the ESOP pool prematurely, hindering future growth.
Before we proceed, let’s take a minute and understand the basics of an ESOP pool and when is typically the right time to create one. Satheesh KV, former HR Director at Flipkart & co-founder of Spottabl, in a webinar with Trica Equity, said:
“Create the ESOP pool as early as you can. I believe the ESOP pool and associated governance processes should start from Day 1”
It is important to remember that as the market matures and the exposure to equity ownership in early-stage startups furthers in the country, the company’s ESOPs pool size can serve as a powerful signal to attract high-quality talent. Setting aside a 10% ESOP pool or slightly larger,i.e. up to 15% signals generosity and a commitment to wealth creation and shared ownership for employees.
However, creating a successful ESOP plan isn't a linear journey, especially for early-stage startups. It's an art, influenced by various factors. Let's consider a few decision-making frameworks that can help founders design a successful ESOP plan:
It's important to note that there is no one size fits all approach and there are several factors beyond the seniority levels of employees that need to be considered before rolling out employee equity.
Equity allocation is a complex yet critical aspect of building a startup's team. We interviewed several Antler portfolio founders and early-stage people success leaders to learn about what are some of the best practices in arriving at the right quantum of ESOPs for a critical hire. Here are a few of the top ones:
The best practices laid out above are by no means prescriptive. Founders, especially early-stage ones, need to adapt these to their specific company context. By considering things like long-term goals, the kind of company founders are building, and where the founders are in their journey, they can shape a fair ESOP policy that can be truly impactful. This means not just relying on data, but also on stories that show the value of employees owning a piece of the pie from the beginning. The connection between giving employees a stake and their motivation is a big deal, showing that everyone's success is tied together. So, beyond the calculations, it's about creating a sense of partnership, ownership, and shared growth. Ankita Tandon, founder, Infinyte.Club summarizes this well -
“Being a founder means you will inevitably make some hiring mistakes along the way. It's just part of the journey. When you offer equity to your team, you’re not just giving ownership to early employees but you're also creating a window for both you and your employees to assess mutual alignment within that crucial first year.”
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