Employee Stock Ownership Plan is awarded to employees so that they work better for the betterment of their organization. There are several other things to be considered when offering the employees this plan. It is a profit-sharing plan which is beneficial both to the employer and employee.
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The best co-founders tend to develop a business on mutual passion and understanding. So the discussion of equity is pretty straight-forward. It may not even take longer than five to minutes. But 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 at the time of their distribution, the equity is either worth little or has very little exit value. So what do you need to consider?
How High Can You Go?
When deciding with how much equity to part with, it’s always worth factoring in the potential value of your company. If you’re building, let’s say, a social media platform which could be valued in the billions some day, you would need to allocate much less than if you’re starting a chain of restaurant. In the former case, you may want to limit the entire pool being allocated to employees at 10%, while the latter may want to limit it at 20%.
What Are You Paying?
Start-ups don’t pay employees, at least their early employees, their market value. These employees need to be motivated through equity. 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 you are paying them their market value, what you pay them in stock could be much less.
Do they 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?). Equity is the most prized asset of your company. Don’t devalue it by offering it to people who would rather just have the money. Instead, give it to those who will build your company and want to remain loyal. There are ways other than equity to motivate the others.
Are they your B-team?
There is a clear distinction between your co-founders and your Team B, but these early employees must enjoy a position elevated from the rest of the company. These people must, therefore, be respected by others. So dwell on this matter: are you giving the employee stock option plan to your B-team? Do they have a good influence on your company?
Follow the above inputs on offering the ESOP at the right time for your employees. The actual benefits of ESOP are detailed in the above article. Ask the above-mentioned questions to decide about the ESOP to your employees. Start-up companies can grow in their business with this attractive plan.