ESOP or something else?

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

28 Responses to “ESOP or something else?”

  1. About alternate incentive mechanisms, I read somewhere about sharing profit. I am a beginner, so I dont know the practicality of profit sharing, but do you folks think it would incentivize people if you commit to them sharing x% of your profits, once you become profitable?

    Similarly, if profit sharing could work, would the equivalent of ‘how many companies have a good exit in x years’ be ‘how many companies become profitable in x years’ in the context of success stories?

  2. Vikask says:

    Roshan: Well said. Help me understand this one point in detail.. Is the premium, as you say, an “unfair reward for what seems like a ridiculously small amount of bright thinking” or a reward for a ridiculously large amount of risk taking?

    An employee, in a start-up or an MNC, is essentially seeking the security of a fixed salary (and future gains to mitigate the risk). In such a situation why shouldn’t promoters get the “unfair reward”?

    However, this does not mean that the promoters should not let employees own the company and the decision making process. Completely agree with point 1 above.

  3. Old Hand says:

    Roshan’s comment throws up many points worth discussing however currently limiting just to one:

    It would be good to know whats the value of an idea (in terms of shareholding)? If 3 cofounders are coming to implement an idea thought up by 1 main founder, (all other things being equal) should they all be holding 25% or the idea creator should hold a bit more, and how much?

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