Offer ESOPs whenever you cannot pay market price to a talent
An employee stock ownership plan or ESOP is a very valuable currency which barely a few Indian startups use effectively. It is a very powerful tool and can be used effectively to build the foundation of a scalable enterprise.
Here are a few reasons why startups should give importance to ESOPs
Monetary value: ESOP is like a very very expensive currency. Entrepreneurs should respect that currency and use it very diligently as well. I have seen cases where ESOPs have been handled extremely diligently and others where they have been dished out without too much thought.
Long term value: Whether potential employees see value in ESOPs is a matter of how an entrepreneur is able to communicate the value creation cycle to them. An entrepreneur is a sales person in every point in his/her life or the journey of the business. They sell to investors, to potential vendors, to potential customers as well as to potential employees. What he/she is selling to potential employees is to option of buying into a dream of a journey that he/she is creating.
When to offer them: ESOPs need not be offered only at an expansion stage but at any stage. The moment you need to hire talent that you are not able to pay for (which is the case with most startups), that is the time you should start looking at using your ESOPs as currency to hire the talent.
How many: My suggestion to startups is to try and get as many people as possible on ESOPs because that indicates a commitment of the individual into the dream and vision rather than just getting slightly higher salary than what he/she was getting previously.
Investors' reaction: Investors encourage founders to carve out a ESOPs pool between 5 to 20 per cent of the equity depending on how well balanced the existing founding team is. If the team has gaps that need to be filled in, it is important to carve out a higher per cent as that will allow you to hire the right resources to complete the team.
Strategy: ESOPs is a powerful tool available to startups to not only attract but retain talents as well. These are attractive for potential employees because it allows them to participate in the upside if the startup becomes successful, and thus alters the risk-reward equation for them.
Transparency and ambition: As an entrepreneur, it is important for you to communicate the 'value' that your enterprise is likely to create and thus explain to potential employees the value of the stock they are getting under the ESOP. If the company is successful, the stock can provide a significant upside to employees.
(Raut is the founder of The Hub for Startups, an organisation that helps startups build sharper business plans. As told to Tehcircle.in's Priyanka Sahay.)