Why the Startup You Work for Should Offer You ESOP

If you're thinking of launching your career in a startup, these 4 letters should be no stranger to you.

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One way to boost employee's motivation and morale is to offer shares in the form of an Employer Stock Ownership Plan (ESOP). In the following, we want to highlight why ESOPs are beneficial for both the company and employee.

 It's a plain fact that a startup can't operate without its employees, making them the biggest asset a startup has. Employees are the ones who create, improve, sell, and ship the products. As such, it's integral that the employees identify themselves with the company's mission and believe in its success. Most employees are emotionally invested in the company and committed to their work, fostering a familial relationship with their colleagues. 

ESOP: The employee retention (and motivation) strategy 

Nevertheless, employees can find themselves in a situation where they want to change their jobs because of financial or personal reasons. To prevent them from leaving, startups can offer a variety of attractive benefits; among them, one of the most sought-after ones are ESOPs. This offer can even help boost motivation and morale as employees will be financially invested in the company, thus strengthening their sense of belonging. On top of that, it also gives them an incentive to excel in their work and stick with the company during hard times, as they can benefit from a turnaround. So, employees will be in the company for the entire ride, against all the odds, and actively contribute to its success.

Both compensation and bonus 

Furthermore, it's a welcomed compensation for the comparatively low salary associated with most startups. Especially for people in more senior positions who are looking for a career switch from a corporate to a startup, they are more likely to make the switch if they're offered some shares as part of the employee benefits package. ESOP can be offered as compensation for part of an employee's salary or even as a bonus for a stellar performance. More importantly, it can lower the overall turnover rate as employees have to stay with the company if they want to reap the potential benefits.

The realities of ESOP 

But as an employee, you have to stay realistic. It's common knowledge that most startups fail after a few years, which renders your potential shares worthless. Furthermore, you're probably entitled to own a certain amount of shares and not a certain percentage, meaning you'll be diluted in the following funding rounds. Of course, this doesn't mean that your shares will be worthless. On the contrary, your shares will likely gain in value as the company will be valued at a higher amount. But it's highly depended on the founders and the contract you sign. Other stakeholders can easily sideline you. Thus you would need to know and trust that the founders have your interests in mind too. Furthermore, the devil lies within the details, it's possible that your potential shares are only available to you under certain and strict conditions. So be sure to ask questions and talk to other people to get a comprehensive understanding of your ESOP.

The verdict

Employer: Basically, a startup can only benefit from offering shares to its employees. It's only fair to let them in on a successful exit, as the employees are the bulk of the reason for the overall success of the company. 

Employee: All in all, it's a very risky compensation, so you need to evaluate the job opportunity (i.e., your professional opportunity costs) and the likelihood of the startup succeeding.

Marco Eylert
Co-Founder | TalentSpace

Marco's a co-founder at TalentSpace, and he previously worked at McKinsey & Company, Roland Berger and Credit Suisse. He graduated from Bocconi University and Johns Hopkins SAIS, where he was a scholar of the Haniel Foundation and the Studienstiftung des deutschen Volkes.

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