Almost all tech companies provide employee ownership through an employee stock option plan (ESOP) in order to align its stakeholders’ interests, including those of its employees. But only a few employees really understand what they get and so the desired effect of motivating people to maximize their involvement never really happens.
Why? As a founder, you know that making something REAL isn’t about administrative paperwork but about that moment of clarity when something becomes self-evident. An ESOP doesn’t mean anything for your employees so long as you don’t make them truly understand what it is.
I learned that through my experience at La Ruche qui dit Oui ! (LRQDO), a French tech company enabling a fair food system across Europe by helping groups of consumers to buy groceries directly from producers. When I joined the company following its series B round of funding, one of my first tasks was the implementation of the company’s ESOP for all employees, all across Europe.
I knew a little about stock options, free shares, and BSPCE (the French regime for employee stock options) thanks to my law studies and internships. But that was really only theoretical — useful when you want to design an ESOP for a final exam, useless when it comes to creating one that truly matches a real company’s strategy and culture.
So here is what I learned, in short 😉
1. Signing papers doesn’t make anyone aware of what those papers mean
I had to make sure that all the French employees that had been granted BSPCE — all our employees with long-term employment contracts — had effectively signed the hundreds of pages of contracts drafted by our lawyers.
The early feedback from the team demonstrated an obvious lack of understanding:
- “ What’s the difference between an option and a share?”
- “ Is it free, because you said that we have options granted for free?”
- “ Hey, Flo, thanks, that’s really enlightening but how can I sell my shares?”
- or more straightforward: “ BSPCE, that’s bullshit “ 💥💥💥
It has pretty much become common practice to have users agree to terms and conditions without having a clue about what their commitments really are. But your employees need to understand the logic to be motivated by an ESOP.
2. Employees don’t care about what you think they care about
At that time, I hadn’t seen Wait But Why’s method on parsing and transmitting complex ideas. It could have helped me. Plus, my understanding of how the venture capital market works was pretty limited, and the strategy of the company was driven by preserving its independence, not being sold off or going public. Given that, it was pretty hard to find the right answers.
I took another shot at explaining how it works, focusing on the difference between an option (the right to buy a share at a predetermined price) and a share (ownership of part of the firm). Then I focused on how to sell the shares. It was a waste of time: the ESOP tool failed to motivate employees, especially early employees who just wanted to exercise their options and sell their shares.
Maybe my explanations weren’t clear enough. But then I realized that aside from difficulties in selling the shares, the main problem was that most of the employees were not driven by the desire of bringing the stakeholders, including themselves as employees, into line with the principle of shareholder value creation. It just wasn’t the company culture and, what’s more, French employees aren’t familiar with tools dedicated to shareholder value… They’re much more accustomed to traditional compensation like cash bonuses.
3. The complexity of multiple European systems makes it really hard.
I had to model and implement the ESOP for international employees working in multiple different countries, all of whom had been promised the same stock incentives as French employees.
Realize that there is no European single market — there are just complex regulatory and tax issues. Forget what you learned at school about the European single market. Each country can tax the employee according to its own rules. There may also be steps the company must satisfy for legal compliance. Some people have started calling this the “mobile employee equity dilemma”.
After studying the different possibilities, we decided to solve the problem by using the same ESOP with the French holding company, rather than its subsidiaries, to simplify management and reduce costs.
Then we decided to listen to our lawyers and grant free shares. Terrible idea.
- First, it does not create the same mechanics. When you have stock options, you have a right, but not an obligation, to buy shares at a fixed price, subject to certain conditions (seniority, performance, etc.). When you have free shares, it’s a promise to get shares for free if certain conditions are met (seniority, performance, etc.).
- Second, it raises tax concerns for employees who have been granted free shares. We thus replaced free stock with stock options…
We struggled for more than 2 years to implement the complete ESOP, and we ended up with uncertain results in terms of employee motivation. No matter what, there was a certain bitter taste to the whole experience. And the end result was really most effective for our lawyers, whose bills kept being paid up as we struggled to get it all done.
4. Dedicate time to explaining what the employees can get — for real.
Prior to explaining anything you need to understand how venture capital markets work. Just remember how hard it is to understand all the technical terms like option, shares, vesting, cliff, strike price, leavers, dilution, right of first refusal, drag along, tag along, change of control, acceleration provision, exit… Then put yourself in your employees’ shoes.
I took a lot of time through both presentations and individual meetings with each employee concerned to explain the basics of an ESOP and the conditions set forth in our plan. Many thought that it was really useful because they got a quick introduction to the startup ecosystem and the VC world. But you have to accept that not everybody will be interested in or remember the technical aspects. This is why it’s also important to give them written material that they can read from time to time.
How you communicate about your plan matters as much as the plan itself. Here are some quick recommendations:
- Make it simple and assume employees don’t know anything about ESOPs.
- Be realistic and transparent in terms of your employees’ expectations and do not oversell its value.
- Match it with your global strategy and the company’s goals.
If it seems obvious that’s because it is obvious. But you know that making complex ideas easy to understand is always easier said than done.
5. Surround yourself with a group of top-notch experts, ready to provide solutions.
If ESOP is more an art than a science it’s also a technical tool existing at the crossroads between finance, HR, tax and legal matters.
Not all lawyers are able to provide you with the right support, and that’s even more true when you develop your business abroad and face the mobile employee equity dilemma. Thinking any lawyer can do it is like thinking any doctor can perform heart surgery.
In the same way, most lawyers are usually risk averse when it comes to new compensation schemes based on equity. And most investors see ESOPs as a fiction protecting their own interests (that’s more difficult to understand, but it’s also another story).
Nevertheless, you will need talented experts to make your ESOP a real success and you will be the only one that bears the responsibility to find them and to implement it properly.
So ask your peers and don’t hesitate to challenge your investors and lawyers again and again until you are sure you have the right experts on board, ready to provide solutions that suit your philosophy and the company’s goals.
6. Don’t copy-and-paste others’ models — it’s not about a contract, it’s about a method.
Your ESOP reflects your company. It’s a tool that must be tailored to the characteristics of the company, its culture and DNA, and the specific aims it wishes to pursue. If you are not well prepared you should wait to have a clear view on how to use it before any communication and implementation. If you just want to replicate the market standard, avoid disaster and don’t do it. Otherwise, the real world will teach you some hard lessons.
We always hear that startups aren’t just about money, but rather about human beings. But we should STOP using this kind of foolish marketing punchline so long as all the players (VCs, founders, lawyers, business angels…) aren’t making it real! We need to understand that building a strong and sustainable startup ecosystem in Europe comes with sharing the monetary value with the people who work for startups. It’s a win-win. So let’s build a virtuous and more fair entrepreneurial ecosystem in Europe!
I’m Florent, a former in-house lawyer who shifted in order to provide strategic support to tech companies and make employee ownership a real thing. It is something I am truly passionate and believe it can fit to any startup, today in Europe.
Spending several years working in a well-funded startup, I developed solid expertise in corporate law, tax law, and venture capital, and I know what truly drives (or doesn’t drive) employees through equity incentive plans. I’ve been through the system and I know it’s not just a science of numbers and paperwork.
