Articles to read before drafting an Employee Stock Options Plan (ESOP)

Jun 19, 2019 · 3 min read
Design by Sophie Louise Hurley Walker

Drafting a good employee stock options plan (ESOP) is one of the best ways to recruit talent. This will empower employees by aligning their long-term interests with your vision and the company’s mission.

But drafting a good plan is not that easy. It involves knowledge of the law, taxation, finance, and human resources, and it’s rare to find someone who has expertise in all these subjects. While raising funds is heavily discussed in the startup world, employee equity is largely set aside. There are some likely reasons for that. Maybe it’s just less interesting to talk about employee equity since the shares are granted in exchange for people’s time and energy, not large amounts of money.

However, the way you incentivise your employees is just as important, if not more, as the way you finance your company with investors.

Two mistakes commonly made by founders:

  • Unfair plans. Just as there is no one-size-fits-all salary policy, there can be no one-size-fits-all approach to employee equity. Entrepreneurs usually struggle to draft a plan tailored to their culture. The way you incentivise your employees will impact the way they perceive the company. Equity is a way to make them feel like they’re an owner (and this is true), so if you do it right it can help you both in recruiting and dramatically improving company productivity.
  • Lack of communication and transparency. Even if you draft an ESOP that is perfectly suited to your company, it will not motivate any of your employees if they don’t understand it. Worse, it can result in major backlashes and trust issues if your employees misunderstand it. For example, a lot of employees are not aware of the difference between shares and stock options (and if you don’t know, either, this article is for you!).

That is why we released the Ekwity Library: 100+ best resources on employee equity.

Design by Sophie Louise Hurley Walker

Today, we present you 5 resources to highlight the most important aspects of drafting an ESOP.

Concrete Overview

1.Rewarding Talent: A guide to stock options for European entrepreneurs by Index Ventures — The Bible of employee ownership. Check out this part to make sure you know what stock options are ;)

How Much to Give?

2. Paul Graham: The Equity Equation — Deciding how much equity or stock options to give is an art rather than a science, but there are still elements that can be discussed rationally. The legendary Paul Graham gives a clear approach thanks to one simple formula: 1/(1 — n).

3. Willy Braun: Startups Employees Perks & Incentives — Everything cannot be settled with one simple formula. Willy Braun digs deeper in the right questions to ask to know how much equity to give and to whom.

Red flags

4. Venture Hacks: The Option Pool Shuffle — There are some risks involved when raising funds for your startup, and you should definitely be informed on the question of the Option Pool if you don’t want any bad surprises.

5. Venture Hacks: Accelerate your vesting upon a sale — In case of an exit, you can lose some of your stock options. That is, of course, if you do not understand the acceleration clause in the contract.

Ekwity’s mission is to help entrepreneurs to share the value with their team. Our goal is to save entrepreneurs’ time and hassle while providing the best assistance in designing and implementing a tailor-made employee stock options program (ESOP).

We provide:

  • Comprehensive knowledge base of benchmarks/best practices in employee equity throughout Europe
  • Advisory services with the best experts to set up a company’s employee option program based on their specific business needs
  • Training on employee equity from general introduction to the creation of specific communication material for your in-house teams

Interested in our services? Contact us now!

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