esop

ESOPs 101: Know your stocks

ESOPs 101: Know your stocks

 
 
 
 

Arvind Parthiban

 
 
 
 
 

August 24, 2020

Share it on

 
 
 
 

Arvind Parthiban

 
 
 
 
 

August 24, 2020

Share it on 

“Why should I accept an offer with ESOPs when there are well-established companies offering similar or more assured compensation in cash?”
 
 
 
“SaaSBoomi is a unique, one-day intensive bootcamp brought to you by Indian SaaS founders, who have been there and done that, to help promising enterprise software startups demystify the next steps of achieving hyperscale.”
vaidyanathan
In this three-part interview, Vaidhy and I will discuss what ESOP is all about. Founders who are just starting out or looking to hire talent can use this as a playbook to educate uninitiated candidates on ESOP.

First things first. What are ESOPs?

 
ESOP is the abbreviation for Employee Stock Option Plan. These are stock options that companies give their employees as part of their compensation. You can exercise the ESOP after the vesting period, by paying the strike price and acquiring its equivalent in shares.

What is an exercise price?

An exercise price is a price at which you can buy the shares in the future irrespective of what the true price of the share may be at any given point. At the time of offering the shares, the price was 1 USD. But after 4 years, even if the price of each share is 100 USD, you will only pay 1 USD to buy a share.

What about vesting; what does it mean?

Vesting is essentially your right to buy company stocks provided you complete a certain number of years with the company. Usually, the vesting period is four years. This means you need to be an employee of the company for four years if you wish to buy all of those 100 shares.

And cliff?

The purpose of a cliff is to ensure that the employee stays longer with the company. The cliff is the duration of your stay with the company that qualifies you to receive the first part of your vesting. In the above-mentioned example, the cliff is 1 year. You need to be employed in the company for a year before you can get 25% of the shares. If you leave the organization after 11 months, you will get nothing.

Are there exceptions to the rule?

Of course.

Okay, so there’s the exercise price, vesting period, and cliff. Tell me, how do I benefit
from ESOPs.

Okay, so there’s the exercise price, vesting period, and cliff. Tell me, how do I benefit from ESOPs.

Surely, you must have heard stories of people who joined early-stage startups and became millionaires? Such success stories are aplenty. But there are many more stories of failure too.
“If the company does well, the share prices will go up multiple times while the agreed price is much lower. You stand to make a huge profit. You don’t have to buy the shares if the company doesn’t do well. You stand to lose nothing.”
The general rule of thumb is 10 percent of startups succeed while the rest fail to scale. It’s sort of a gamble. If the startup succeeds, the value it creates for you is phenomenal. If it fails, you’d lose the years you worked there but gain experience.
“Given a choice, I’d choose stocks over cash. I still kick myself for not negotiating better in the earlier opportunities.”
Before you decide to join the startup, you need to consider the startup’s chance of succeeding, the founder’s record of building and scaling the business, and the strength of the investors. While personally, we would opt for more stock than cash, you need to decide what works for you.
 
 
“You need to exercise due diligence on the founder, the business model, and the viability of the company.”

Can I sell my shares?

Yes, you can sell your shares. But before we get into that, let’s first discuss how you can buy them.

Then, what’s the point of opting for
ESOPs over cash?

Then, what’s the point of opting for ESOPs over cash?

That’s a million-dollar question.
“As the start-up grows the shares will increase in value but without a market to sell.”
“Since it usually takes at least 10–12 years for a startup to scale and go public, you need to be prepared for the long haul.”

Let’s say I own shares at the company
I am working for. I decide to leave.
What happens to my shares?

Let’s say I own shares at the company I am working for. I decide to leave.What happens to my shares?

 
 
Generally, you have 90 days to buy the vested shares. Once you buy them, your shares will remain with you until the company goes IPO, secures a round of funding, or gets acquired. If you don’t do so, all your vested share units will lapse. There will be nothing you can do about it.
Let’s quickly recap what we’ve covered so far:
  1. An ESOP is a compensation structure that startups adopt to find and retain great talent. It works as a great motivator for the startup and the employee. When you affect an ESOP offer, remember you are signing up for the long haul. The longer you stay, the higher the benefits you reap.
  2. There are various clauses in an ESOP. It is important that you understand what you are signing up for. Don’t shy away from asking your employer questions about what the ESOP looks like for you. They will be happy to answer them for you.
  3. It’s partly a gamble because you are investing your time in the company in exchange for a share(s) in the company. If the company grows, the value of your shares grows. If it doesn’t, then you lose nothing except for the years you spent with the company.
 
 

Share it on

Share it on 

Other Stories

Subash Thyagarajan

Aug 2, 2020

Abhi Ballabh

Aug 01, 2020

 
 
 
 

Soumitra Dasgupta

Apr 13, 2020

Subscribe to Our
Monthly Recurring Report (MRR)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

To read stunning SaaS stories, to stay up-to-date with your Indian SaaS ecosystem, and to learn from the best of the best SaaS minds.

Subscribe to Our Monthly
Recurring Report
(MRR)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

To read stunning SaaS stories, to stay up-to-date with your Indian SaaS ecosystem, and to learn from the best of the best SaaS minds!

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

We are a community of founders and product builders shaping India’s SaaS industry. Our mission is to help SaaS founders learn from each others’ journeys across different life stages of their companies -from ARR of $0 to $100 million and beyond.

LEARNING HUB
MEDIA
CONTACT
 
 
 
 

hello@saasboomi.com

Privacy Policy
Terms and Conditions
Code of Conduct
©2020 SaaSBOOMi, Inc All Rights Reserved