We have had discussions earlier here on attracting great talent to startups, and what the key motivators are. Clearly, there are other motivators besides money in a startup decision – such as sense of purpose, role that one can play, and so on. However, the more I talk to entrepreneurs around, the more evident is the lack of a financial incentive that works.
Couple of weeks back, I was in a group of entrepreneurs for a closed-door discussion on this. There was near unanimity that employees do not value ESOP grants. There were still some people who were allocating ESOP, especially to early/core team, but with very little conviction. One of the things that also came up was whether the entrepreneurs themselves understood this well enough and believed that it can make a difference.
In my opinion, the key gap is in building a perceived value around this tool. It is about highlighting and celebrating successes. Early/core employees need to believe that if this thing works, they can make far more than they will ever earn (yes, even after accounting for high salary increases that we all experience). Towards that end, it will be good to get some success stories in response to this thread, where key employees have landed up making significant returns through ESOP in startup situations.
Also, would love to hear people’s thoughts on alternate incentive mechanisms that serve the purpose. In my opinion, the key attributes that such a mechanism must satisfy are:
- Alignment with value creation objectives of shareholders
- Retention effect/ Accumulation effect of rewards
- Ability to attract distinctly better talent, especially against large companies
- Performance orientation
- Promoters or Entrepreneurs – A choice for Private Equity players - August 3, 2019
- Startup Marathon Mindset - March 25, 2019
- What’s your Customer Culture? - March 4, 2019
I will agree that not all the employees value ESOP and they would rather prefer the entire compensation in form of salary.
But with our senior employees we did not find this to be a problem. These are the people who have been with company since its start and have grown with the company. They do value stock options and are ready for lower salaries with options.
We are now starting to work on implementing and formalizing the structure. The problem that I found so far from my interaction with the Lawyers and ESOP consultants that there are lot of restrictions on who all can the options can be issued to. I have been told that consultants and advisers cannot be issued any options, it can only be issued to full time employees. Further the whole issue of FBT and valuations for non listed companies (which I am sure most startups are) makes it further complicated and expensive.
If anyone of you have any experience with this or can guide how do you cover non employees, will be great.
Am part of a financial services subsidiary of a large indian company. We were told since the last two years that the owners are considering providing ESOPs to select employees. I rejected a few offers based on the promise since i was expecting the company to do well especially a newly formed division. Finally these guys decided to demerge this new business into a new entity and the person promising the ESOPs to me and various others has also gone to the new entity.
Lesson learnt is not to take any verbal assurance and only consider the same if it is in writing
Totally agree with the fact that currently ESOPs don’t work and also that celebrating successes can really help.
Unfortunately, even I don’t know any friends who got rich with ESOP’s – though I do know a founder couple who cashed out around a half a million USD for a 6 month old bangalore based startup.
Alok,
Adding to comment above by anonymous, all entrepreneurs aim to create a value for their idea,and they start off with a strong belief in their idea. But when it comes to creating the same confidence in their team for the idea, things start failing. Quite often then not, the founder does struggle to predict where his venture will be at the end of couple of years and it’s no easy task at all What I intend to point out here is, this vagueness affects things somewhere. How do you convince a hire on what kind of gains can be created through ESOP. On top of that, the industry doesn’t have many stories to support you. This is further complicated in the case of a first time entrepreneur with a venture which is yet to be funded.
Secondly a lot of startups tend to use stocks + salary option to attract talent. And sometimes the salary component is lacking compared to the prevailing market standards. This being a job seekers market, you just can’t assume that somebody will sacrifice on the salary part for the thrills and exposure of working in a startup, particularly at the junior levels. An entrepreneur is driven by his passion and if you can’t get that passion in your team, you will have to attract and retain them by offering higher salary, challenging roles and responsibilities. Meanwhile we can hope that we will see some more success stories so that people start appreciating ESOPs better.
If employees believe that the company can get acquired, listed, or generate enormous revenues than ESOP has a value to them else it doesn’t.
The monetory gains from ESOPs is long term, employees who have just started their careers (freshers) would naturally strive for short monetory gains. (Lets be honest funded or not most indian startups have freshers as majority in their workforce.)
Many startups just keep the vesting, grants verbal, also the finance/funding aspects are not disclosed to all core team menbers. Then how would you expect them to buy the ESOP story. Give them a legal document stating so.
Finally the bottom line, I have no friend who got rich with ESOP’s here in India.