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ESOPs for Startups by Rodinhood


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Esops can change your life. They are probably the most valuable contribution that Startups make to the lives of employees who suffer low salaries and long hours while working in new Companies. However, ESOPs as a concept is confusing and complicated and needs to be understood well.

This is a humble attempt to demystify ESOPs.

Published in: Business

ESOPs for Startups by Rodinhood

  1. 1. Esops for Startups! Guidelines and References Alok Rodinhood Kejriwal
  2. 2. Who is this meant for? • Startup entrepreneurs who need guidance on Esops ideas and policy for their Company. • Employees who need to understand what Esops are, and how they work. • People else in the business ecosystem who may have questions on Esops and its core principles. • Anyone interested in learning about a very interesting and valuable capital idea that has been responsible for creating massive wealth for employees and employers!
  3. 3. Disclosures: • The principles and guidelines spoken about in this presentation are used and adopted strictly for the 2win group of companies that I operate/have invested in. • There are various alternative interpretations of Esop best practice that other companies and employers may adopt. • This document should serve as a guideline and reference - not as a rule book!
  4. 4. Credentials (proof of success)
  5. 5. Content flow 1. What are Esops? 2. Why are Esops important? 3. Who gets them? 4. On what basis are they issue? 5. At what cost are Esops issued? 6. When and how are they given out? 7. What happens if you leave in between? 8. Mock Q&A’s 9. Danger Signs.
  6. 6. What are Esops? • Esop means Employee Stock Option Plan. • Via this ‘plan’, employees receive shares/equity in the Company they are working for. • The ‘Plan’ is really critical. How the shares are allotted, at what terms, etc etc – these are detailed in the plan of the Company issuing the Esops
  7. 7. Why are ESOPs important? • The shares of startup & unlisted companies become quite valuable as the business scales rapidly and becomes successful. • Unlike salaries which costs real cash, shares have massive ‘locked’ potential value that can be given to employees as ‘additional’ compensation to motivate them to work for the startup. • Sometimes, Esop shares deliver major ‘bonanzas’, via listing and acquisition deals.
  8. 8. Who gets Esops? • Anyone and everyone who ‘works’ as an employee of a company is entitled. • ‘Contractors and Consultants’ can get shares via the Esop plan – its just a bit more complicated • Even founders are entitled to Esops over and above their original shares – it can be an additional incentive for them to earn more shares in the Business.
  9. 9. On what basis? For most employees, we allot a certain ‘number’ of shares, basis: • The last price of the shares of the Company, as invested in by an investor • A proportion to the salary of the employee. Lets assume: • We sold shares in the last round at Rs 5000 per share to an investor. • You work at a salary of Rs 7 lacs per annum. - We will propose allotting you 150 shares, valued at 7.5 lacs ( 150 shares * Rs 5000 per share)
  10. 10. At what price? • As a policy, we allot shares to our employees at a base price Rs 1/- per share (being the minimum value that you need to pay for buying the shares). • In the previous example, we would need you to pay the Company only Rs 150/- for the shares that are actually worth Rs 7.5 lacs • We DO NOT believe in pricing our ESOPS beyond Rs 1/- simply because our business is not listed. • What VCs pay per share is subjective and that can be used to explain the ‘benefit’ of receiving shares to the employee – not to extract a cost from them.
  11. 11. When are Esops allotted? • Lets assume that you join the Company on the 1st of November 2012. • The first lot of Esops will be available to you AFTER 1 year of completed service. • This 1 year waiting period is called a ‘Cliff’. • You will complete your cliff in October of 2013. • We allot Esops in April and October cycles, so will be entitled to your Esop plan beginning in October 2013.
  12. 12. How are Esops allotted? • Esops are issued in equal installments over a period of employment of an employee. - This is typically called the ‘vesting’ period. • Our policy is a 3 year vesting, granted in 2 half yearly installments. - This equals to granting 6 installments over 3 years • In your case, you would get 1/6th = 25 shares on each October and April of the years after your 1 year cliff, until till you received all 150 shares.
  13. 13. What happens if you leave? • If you leave before the end of the first year and do not cross the cliff, you do not get any shares in the Company. • Post the completion of the first year, you get shares depending on the 6 half yearly installments that you have crossed and earned. • Lets assume that you work for 2 years after the first year cliff. Then, you are entitled to 2 installments of 1/6th shares each, equaling 1/6th + 1/6th = 1/3rd shares when you leave the Company. As per the example, this would mean 50 shares.
  14. 14. General Concepts explained Why is a cliff imposed? There are 2 reasons: 1.As a new employee, you need to prove your commitment and value to the Company before it rewards you in terms of precious equity. 2.Remember that the Company was valuable before you joined, and so you need to add value to it to be able to participate in its returns. You need to invest your time and efforts in the Company also.
  15. 15. General Concepts explained What can be your real gain? 1. Lets assume you serve 4 years in the Company, and pay Rs. 150/- and buy 150 shares. 2. At the time you joined, the Company’s shares were valued at Rs 5k per share. After 4 years, the Company gets acquired at say Rs.20k per share. 3. Your value of your shares will be 30 lacs! 4. In your case, the salaries you will have earned in the 4 years would be approx. 34 lacs (8.5 lacs per year as a blended average) and you will have further gained 30 lacs value in Esops!
  16. 16. Questions & Answers Q: Why do I need to pay any money to ‘buy’ shares? A: As per the rules, you cannot get shares without paying some moneys to the Company. Q: Can I get more shares via ESOPs beyond the lot that was promised after my first year? A: Yes of course! The idea is to compensate employee performance with regular issuance of new esops. There is no ‘one time’ rule for esops! Having said so, also realize that your first lot of Esop shares also grows each year in value!
  17. 17. Questions & Answers Q: What about taxes? Are there some complications? A: For issuing Esops to employees, it’s the Companies responsibility to take care of taxes. Only at the time you sell your shares, you will have to pay tax, as you would for any income. Q: Can I sell my shares to others? A: It depends on the popularity of the Company’s shares and the market. Its possible but it could also depend on Company policy.
  18. 18. Questions & Answers Q: How do I know what is % of shares I have in the Company? A: This is a tricky one. Most employees will not know and its not important, as long as you trust the management to be fair in telling you what the value of shares was when VCs invested, and how many shares you getting. Note that when senior & director level appointments are made, % are decided.
  19. 19. Watch out for: - The management keeps postponing and formalizing Esops. Either they are being greedy or lazy or have not been able to clear the Esop plan via the VC. - You SHOULD receive printed share certificates of your holdings once a year. We do it as a rule. INSIST on getting your shares and written confirmation of holdings before you leave. - READ the Esop plan carefully!! Watch out for tricky terms and conditions inside. Ask your CFO questions if you don’t understand. - Figure out if Esops are being given to everyone and its a regular feature of the Company’s business plan.
  20. 20. References & Thanks! Special thanks to 2win CFO Satish Iyer ( for helping validate this document and administering 2win esops!
  21. 21. Connect with me!!! e-mail - Facebook - Twitter - @rodinhood My social network for anyone enterprising ! Blogs and articles written by me Presentations –