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
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I am glad that We are discussing this topic . Prospective employee in India don’t value ESOP because of all the reason mentioned above . I want to suggest a somewhat different approach to address this .
if we can connect the point of liquidity to something other than final exit . lets say we link it to the event of raising next round of funding . this is something on the line of controversial practice of issuing FF Class of stocks by Peter Thiel and Sean Parker’ s Founder Fund in Valley but with a slight modification . this is how it can be implemented
Basic premise here is that Its very hard to predict which venture or which team will make a BIG exit [Acquisition or IPO] but Its relatively easy to say which team would be able to raise next round of funding .
so lets say that at the time of joining a startup i am offered X stocks of a company which has raised a seed or angel round till now and they plan to raise a VC round an year down the line . May be we can structure the contract in such a way that our of those X stocks 10% is in FF Class .
whenever startup decide to raise VC round and dilute Y % of overall ownership , People with FF Class stocks can also participate in that . you can make it like 5 % of that Y% comes from FF Class stocks or VC Firm can make an open offer to Employees to so they can offload some stock for any immediate expense[Say a down payment for HOUSE,College Education of kids,CAR,HEALTH]. this will shorten the time of liquidity and make the bet more predictable .
I guess this is a win win situation for everyone involved Employee gets some cash and stay motivated too [ since they will now appreciate the value attached to Non FF class stock ,because they have tasted blood once its likely they would like to have it again ]
,VC gets more ownership of company [since promoter usually are not keen to dilute too much of stake] and startup gets rid of constant worry of losing key employee .
of course there are several grey area in this scheme like who should be granted FF Stock,should we attach a BOND of say one or two years continues service if you choose to offload FF Stocks , Should we issue FF Stock at higher base value than regular stock ? Should Founder themself participate in this ? IF yes than would partial cash out will effect their motivation ?
But if all parties involved agree to the basic idea than i guess these wrinkles can be ironed out
I know this is a controversial idea but i guess this is worth a debate . Please let me know if you think this will work .
On JobsAhead, we started out giving ESOPs to everyone, realized that approach wasnt working, and we need to concentrate the rewards amongst fewer people. All in all, there were some 80 people who had ESOPs, and most of them made perhaps 5-10x their annual saving potential – of course, salaries then were not what they are now. But it let some people buy their first house.
The most touched with ESOP payout amongst the 80 people was a peon who made Rs. 50,000.
Vijay,
No one made money in the Aztecsoft deal through ESOP’s but the founders etc made very good money.
Sameer sold Dishasoft to Aztec and then sold Aztec to MindTree. He made good money in both the transactions.
Similarly I know Shreesh, He sold Frontier to Veritas, Left Veritas, started inRealty and sold it to Symphony, made good money in both the deals,
As I said no big money for ESOP holders(atleast I dont know of anyone).
Vyaas
When I returned from abroad the MNC offered me ESOP’s, I asked for all the variable component(including bonus esop’s etc) to be converted to fixed component, I did not like the RISK factor.
Now I have a startup and am short of money and am offering ESOP’s and performance related bonus and when I find reluctant takers I feel hurt. Am I a hypocrite? Dont know….
If I cannot trust an MNC ESOP I sometimes think why should someone trust my new startup ESOP.
So people believe in ESOP only if it non-risk prone…like you say we’ll give it at 20% less than the market value on that day.
My colleagues in Infosys, EXL, Veritas, VMWare, TCS, Satyam, I know all cashed out with 1 Crore +, because they sold the ESOP’s at the right time.
I saw some indian companies bought by foreign companies, like Kanbay, Covansys, Daksh, Frontier Technologies etc, but apart from the founders none got any big moolah through ESOP’s
Krish, I think the issue is that Most of the time, the founders themselves dont know what and where things are heading. I am doing an analysis of the last ten years, and there are close to 80%+ of companies that are ‘VC Funded’ who are in a slump – not going up or dying fast enough, but just sitting there. And there are a host and slew of companies that should be shut down long time ago, but thanks to the banner or some Godfather protecting them (an incubation centre or some parent company), they keep living on.
So when Founders themselves don’t have that certainty, what do you expect?
Here are the various issues:
1. Unless there is some timeline – atleast saying that “this company will make an exit in 5 years, and these are the reasons why.” will add a lot of credibility. But how many entrepreneurs you know have that much clarity?
2. Emerging markets are extremely topsy-turvy. Nobody knows when they’ll go up up up or down down down. So even the most fascinating economist who manages to pass by #1 is going to stumble slightly.
3. Disclosing core documents to the team. And I also read that most of this team is “Freshers”. Would they even understand head or tail of the plan?
4.There is no loyalty factor here in India. In most markets, things are clearly defined as Technologists, Product Mangers, Investors, Entrepreneurs, Designers, Consultants etc etc, where everybody knows their role and they all make their share of lion’s kill because they are good at it. Hence, it was easier to share your business plan with your team lead, cause you know he wont go out in the next two months and trying starting a Version 2.0 of your company. Here in India, everyone thinks they are an entrepreneur. Which translates to the fear, paranoia and shielding info.
5. None of whatever is being discussed here manages to address the issue of what it takes to “attract” talent in the first place. Thats the biggest problem startups face. The negotiation is only the second bit.
6. In the last seven years of Indian IT industry, I believe there are five exits that have been made. The last being Aztec. Alok, Did anyone in Aztec make money via ESOPs?
We’ve been through this entire debate over and over again at Proto.in and at open coffee clubs. It all comes down to having a few good success stories where employees make money. People will prefer working for startups, equity will start meaning something, founders will have an incentive and hope to try out something… everything, just about everything that we claim as problems in the indian ecosystem, will fade one notch. But that success story, how do you create it?