Awarding ESOP is not something that should be done lightly. Several considerations go into allocating equity and building a mutually beneficial ESOP plan. In this article, we will look into the nitty-grities of a good ESOP plan.
An Employee Stock Ownership Plan (Employees ESOP)is awarded to employees to incentivize them to be motivated and work more efficiently for the betterment of their organization. An employee stock ownership plan also known as ESOP is a profit-sharing plan that is beneficial both to the employer and the employee. There are several other things to be considered when offering the employees this plan.
The most successful co-founders build their businesses on the basis of mutual passion and understanding. So the discussion of diluting equity is not straightforward. This is because the same co-founders tend to be stumped when it comes to allocating equity to their earliest team members. The reason for this, perhaps, is that by giving out ESOP at the time of their exit, the equity will either be worth little or has very little exit value.
However, this does not always need to be the case. By formulating an efficient Employees ESOP plan the co-founders can protect their interests all the while rewarding their earnest employees to keep them motivated. To help you better understand the intricacies that need to be examined while building a good Employees ESOP plan. We’ve put together a list of all the considerations that go into building Stock exchange plans for employees down below:
How High Can You Go?
When deciding how much equity to part with, it’s always better to factor in the potential value of your company. If you’re building, let’s say, a social media platform that could be valued in the billions someday, you would need to allocate much less than if you’re starting a Chain of restaurants. In the former case, you may want to limit the entire pool being allocated to employees to 10%, while in the latter, you may want to limit it to 20%.
What Are You Paying?
What you are paying your employees plays a big role in building a good ESOP plan. For instance, start-ups don’t pay employees, at least their early employees, their market value. Hence, these employees need to be motivated through equity. When allocating ESOP the value of their stock should be such that, three or four years later, their income should be four to five times what they would have otherwise earned if they were paid market value as remuneration. Otherwise, if you are paying them their market value, what you allot to them in stock can be much less.
Do You Value Them?
You don’t just hand out ESOPs to anyone, even if they are among the early and valued members of your team (in fact, why would you hire them at all if they weren’t good at their job?).
Equity is the most prized asset of your company. One mustn’t devalue it by offering it to people who would rather just have the money. Instead, give it to those who will grow with your company and want to remain loyal. This is because there are always ways other than equity to motivate talented employees who are not vested in the growth and expansion of your company.
Are They Your B-team?
There is a clear distinction between your co-founders and your Team B, but even these early employees must enjoy a position elevated from the rest of the company. For these employees to be respected by others, they should be awarded an ownership stake in the organisation.
So dwell on this matter: are you giving away any equity to your B-team? Do they have a good influence on your company? Do you want them to continue styling loyal to your organisation?
Conclusion
Follow the advice given above to offer a sturdy ESOP to your employees at the appropriate moment. To decide on the ESOP, ask yourself and your employees the questions listed above. With this approach, start-up businesses: https://www.startupindia.gov.in/ can expand their operations and keep their employees motivated.
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