ESOP Planning when Hypergrowth-ing
One of my portfolio companies raised a mid-seven-figure Seed round earlier this year and has been hiring like a machine, as one does. They are now at 20 FTEs, with another 10 or so yet to come. Of the 20 FTEs, 15 of them have tenure measured in months (less than a year with the company) and 11 of them have tenure measured at less than six months. At a board meeting this week we reviewed option allocations for these recent hires. I was struck (for the Nth time) how fast an ESOP can be consumed, and how hard it can be to justify (for and/or against!) specific grant numbers for specific hires.
The thing that the exercise reminded me of is the importance of having a heuristic as you move from pure startup onto a hypergrowth treadmill.
When you start a company, equity allocation is fraught with emotion and all manner of ego issues. Three founders who split a company evenly in thirds is the simplest example — but not a common example. Those three founders then hire two or three, often critically-important folks, and provide them equity grants that are still tinged with emotion and ego. Once you get to that roughly 5–6 person core team, and raise real capital, things must change.
Emotion and ego need to give way to calculation.
There are no specifically right or wrong ways to do this. I’ve seen some startups map out every hire they intend to make over their first couple rounds of fundraising, and slot in specific equity numbers a priori for all those folks (this is odd, IMHO, but w/e works!). I often see employees categorized into two to five ‘buckets’ (e.g., exec, senior, junior); and then either (a) have fixed numbers +/- slated for each bucket, or (b) have salary-based multipliers affixed to each bucket. There are other ways as well, of course, and each solution will have its pros and cons.
In addition to the initial allocation, make sure you have a plan for additional allocations. If you hand over a monstrous chunk of your company for a rock-star CMO, maybe that person won’t ever get another grant — but that’s an edge case. Most of the time you will want to plan for future grants. Some companies do them annually. Some companies do them alongside promotions (movement within the aforementioned buckets). Equity grants in a hyper-growth company represent an opportunity for management to continue to reward, incentivize, and retain the best employees. These future grants can clearly “add up” over time, so planning well-ahead is a must.
Be thoughtful about how you manage your ESOP and how you incentivize your team with it. Don’t think about it only when they come on board, but over the lifecycle of your company.
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