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
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- What’s your Customer Culture? - March 4, 2019
yes Deepak, you are right – Taleb is ok with VCs because each move has limited absorbable (sic) negative effect, and a huge potential (but less likely) positive effect. In entrepreneurship, the negative affect is more likely and pretty severe. The irony is you dont get to do VC stuff without entrepreneurs!
Alok: Also note that we are talking about an environment where we are still not talking of people taking paycuts to do this, unlike USA.
Ok this sorta negates my entire argument. (Sorry) I assumed that ESOPs were in lieu of market salaries. You mean it’s difficult to attract people with market salaries and offer then ESOPs on top? This is one tough market then! Throwing more money than market can be interesting, and has helped people in the past. Microsoft’s “acquisition” of Anders Hejlsberg from Borland, for instance, fuelled .NET. Maybe it can work for startups too.
Perhaps people don’t think in weighted averages – but then until there is a sufficient precedent of someone making big money with an esop payout, the concept of esops isn’t going to make an offer more attractive. The problem really is that weighted average cannot be sold – in the US it can.
Taleb’s kinda here and there, and contradicts himself in many ways. While it may not make sense to be an entrepreneur (in the same weighted average odds/return funda) he does mention in other articles how innovations happen entirely by accident and it’s in the continuous innovation process that brings out the gems (not in what you’re looking for but in the serendipity) In fact he himself puts most of his money in deep out of the money options where he benefits only on a wild move, one big return against many small losses.Akin, perhaps, to the VC industry?
Hi Everyone,
An interesting discussion that I think discusses one of the most important things for an entrepreneur. From my experience as a founder, I feel there are multiple problems:-
1. At the board level, it’s tough to break the mindset that giving ESOPs to a team member is ‘giving’ i.e. it means taking something from our pocket and giving it to the employee. It sounds sad but that’s still how ESOPs are perceived by investors and founders. We’ve still not made that strategic shift that an ESOP is not taking cash from one pocket and giving it to the employee and hence a zero sum game but something more powerful than that. Whats a good solution? In my opinion: having an early team member as part of the board and privy to these discussions to put in a reality check on the values that the board decides.
2. There seems to be an implicit feeling of unfairness from what I have discussed with my friends – the founders by virtue of thinking of an idea – no matter how bright – seem to get large chunks of the company and in many cases – fully vested – while even the top 4-5 team members get a measly amount of equity with a huge number of riders. I think this is reflected in the statistics – I was speaking to a junior from IIT Bombay – and in his batch 36 different teams were starting companies and pitching them to VCs. The perception is that there is unfair reward for what seems like a ridiculously small amount of bright thinking. Most ideas getting funded don’t seem to be bright ones, so maybe I should also spin the wheel, right? What can be done here:- I think nothing can be done to correct this feeling of unfairness. If we are fair and build motivated teams, value will be created and shared and a few years down the line, success stories will emerge and can be shared by word of mouth. Probably VCs can help in reducing the perception of unfairness by being more open and communicative about the reasons they made a particular investment and what they saw in one mobile VAS company Vs. the other 2000 in the market. Also probably by encouraging founders to hire smart people. It’s surprising but I have spoken to quite a few senior employees of VC funded companies and they have never had a chance to even interact with the VCs.
Just looking for people who actually made money from ESOPs
– In BPO companies like WNS, Firstsource, (and probably Intelenet when it lists), a large swath of employees — manager and above — seem to have made money when listing happened. I recall seeing the Red Herring books of some of these and actual employee names potentially making $ 1 – 10 M if you did the math.
– However there are also many BPOs where only the top 4-5 got good # of options while everyone else either did not get anything or only a modest amount. Several such companies have been acquired but only the top guys may have made money.
– Couple of years ago one of the ad agencies in Mumbai (forget the name) got acquired by its US partner, at which point practically every staffer is believed to have made serious money due to part ownership.
Deepak, the problem with throwing money at talent is that it at best achieves one out of the four criteria I mentioned (attract talent). Not sure if that leads to success, especially at core team level. I also believe that people do not think in weighted averages – people you want are exactly the people who believe that this startup has a 40% chance of success, even though broad market statistics are 5%. That belief creates ownership, excitement, retention.
Also note that we are talking about an environment where we are still not talking of people taking paycuts to do this, unlike USA.
BTW, am reading Taleb right now, and he does advocate people shouldn’t do startups (for economic considerations)!