Zomato’s IPO was a milestone for India’s start-up scene. According to reports, the food delivery giant closed its Rs 9,375-crore public issue after being subscribed to 38.25 times. But it also highlighted something strange. Zomato’s employees didn’t participate in purchasing these stocks as much as expected. This had some people wondering whether that was due to uncertainty about the business model. But experts pointed out that the main reason would be the ESOPs they’d provided to their employees and key management early on in the game. In essence, people already had the shares they wanted!
So, is this the right model to follow? Should start-ups offer ESOPs early in the lifecycle?
Why Should Start-ups Offer ESOPs Early On?
1. Attracts The Best Human Capital
Reports show that ESOPs are most actively used as a hiring strategy to attract talent. It can be a terrifying leap from working in an established company to taking up a role in a start-up with an uncertain future. Due to this apprehension of the future, many young start-ups are unable to entice the right human capital. This happens even with large pay packages offered to employees. But ESOPs are an attractive benefit that many don’t get this option in companies that have been around for decades. Including ESOPs in the company’s compensation package can act as a magnet for top talent and give them the push that they need to join your start-up. ESOPs can also attract board members and other partners to grow the company. Of course, the earlier the lifecycle stage of the company, the greater the need they have for such transformative talent. That suggests there is great value for them to consider ESOPs very early on.
2. Conserves Financial Reserves
Start-ups will want to use their limited money to develop their business as much as they can, especially in the initial stages. Finding the right people to work for them is just one of those investments. Offering ESOPs early on convinces employees to join and stay while helping the company save their cash reserves for the time being. Thus, the company’s financial reserves are increased by offering these stock options to the employees. That makes it helpful for start-ups to offer their employees ESOPS right in the beginning.
3. Retains Employees During Tough Times
Employees in start-ups are the most likely to change their jobs. But ESOPs increase employees’ feeling of belonging and ownership. Key employees are more invested in the future of the start-up. This helps reduce the rate of attrition. This is useful if your start-up is going through the inevitable rough patch, and the threat of losing your workforce is looming over you. ESOPs reduce your employee churn rate. This is even when the company is unable to propose lucrative bonuses or other offers. It lets workers know that if they stick it out, they’ll be able to partake in the future prosperity of the company. It also gives them a timeline, as they have the vesting period to use as a checkpoint.
After this amount of time, a certain kind of emotional connection is also built between the company and its employees. Add to this the additional psychological appeal of owning a part of the company, and you have a workforce who is almost as attached to your company as you are. That’s why ESOPs are used as an employee retention strategy.
4. Encourages Better Employee Performance
The investment doesn’t stop at emotions. Since the employees will have a piece of the pie, later on, ESOPs actively motivate employees to do their work more purposefully with a focus on generating great outcomes. Employees feel that they’re potential shareholders and owners, which makes them feel more responsible for the company’s growth as they will benefit from this in several ways. They are willing to go the extra mile and take on more initiative. That boosts the company’s growth and increases employee engagement. Essentially it rewards value creation much more than a one-time bonus would. Of course, early on when the people are fewer, this desire to go above and beyond the call of duty is not only necessary, it is also invaluable.
5. Creates Long-Term Thinking
Normally, employees would be more inclined to think in the short term. They’d be concerned with short-term bonuses, profit sharing agreements, and periodic appraisals. These can be spent quickly and aren’t good stores for the future. But ESOPs let your team nurture long-term thinking and entrepreneurial mindsets. They act as an incentive for your employees to think ahead and do their best to create a strong and successful company evolution which benefits everyone. There’s no doubt that both the scope and the potential impact of such actions are greater at the early stage of the start-up.
If you’re an early-stage start-up, it’s clear that ESOPs are for you. Of course, you need to get the strategy and execution right to get the maximum benefit. We suggest consulting with an ESOP expert to ensure you’ve created the best possible options for your employees. And as you are asking yourself if it’s worth it, remember that it worked for Zomato!