Is there any disputing the central fact that employees contribute actively to the success of a start-up? No wonder founders see employees as their most valuable assets, especially in an early-stage start-up.
Given start-ups are usually cash strapped and need to use funds judiciously, offering sky-high salaries to attract top talent can often be a non-starter. Startups can, however, leverage ESOPs as a strategy to attract top talent and as a reward to benefit those people who help the organization create value. ESOPs can be a powerful tool that helps in boosting employee engagement by enabling employees to share the future prosperity of the company. Additionally, ESOPs can also provide start-ups financial benefits while giving them the opportunity to retain their loyal, high-performing, and hardworking employees in a tough market.
When it comes to creating ESOP strategies, organizations sometimes look at tax accountants to design their ESOP programs especially since there is a tax, compliance, and regulatory framework to navigate, rather than looking for professionals having holistic experience in ESOPs. However, start-ups need to design ESOP programs such that these programs help them achieve their business objectives more easily. Not all ESOP plans are created equal and knowing a good plan from a barely-functional one can be hard.
Here are some of the signs that signal a successful ESOP strategy
A comprehensive and strategic ESOP plan
The concept of ESOPs is quite straightforward but they do involve many variations in the initial setup to address the nuances of each start-up. Making sound decisions at this stage is important to drive ESOP strategy success. This stage involves determining elements such as share sale schedules, employee eligibility, and participation, vesting schedules, share repurchase details, founder equity dilution, etc.
Evaluating whether there will be a dilution of full ownership or evaluating phantom stock options, assessing dilution appetite, etc. are important touchpoints. The ESOP strategy should be comprehensive to account for the growing needs of the start-up and will need to be communicated to the employees clearly at the start to set the right expectations.
ESOP plan design must have the relevant features and the right terms and conditions that suit the organizational needs. These have to be complemented with the right legal documentation including resolutions and scheme documents.
The financial structure of the ESOP plan is one of its foundational and most important pillars. Not having the right structure can be disastrous for start-ups as it can cause the company to lose ground during potential liquidity events. Leveraging experienced ESOP plan advisors with the right domain knowledge ensures a successful plan design and pursuant strategy success.
An effective and ongoing communication strategy
To reap the value of ESOP, communicating its value to employees proactively and continuously becomes important.
ESOPs are not simple or straightforward for laymen. A successful ESOP strategy allows for this. It is rooted in effective communication that helps employees understand the instrument, the limitations it has, and the situations where it will be beneficial. This is especially important while dealing with employees from non-financial backgrounds.
ESOP strategies also have to be open to evolution to accommodate the growing needs of a start-up. Additionally, keeping employees posted periodically on the financial performance of the company and the value of the options based on the latest independent valuation contribute towards generating greater trust and engagement.
Clear and ongoing communication is the hallmark of a good ESOP strategy. It helps employees become more invested in organizational success as the ESOP strategy becomes objective and transparent and does not remain subjective and unclear.
Effective Plan management
ESOPs can seem deceptively simple but need engagement from several functions other than accounts as well. Departments such as HR, Legal, Finance, and Corporate (Shareholders / Investors) are all involved parties.
Good ESOP strategies are fluid and can accommodate change and transparently communicate the same. ESOP strategies need the backing of powerful plan management to capably roll out online grants and their acceptance.
Using technology-enabled ESOP management platforms can contribute towards increasing transparency by allowing employees access to their grant documents, options data, and reports from individual logins. Having additional data analytics capabilities to enable extensive management reporting and analysis contributes greatly towards ESOP success as it drives better and data-backed decisions.
Adept Liquidity Event Management
Start-ups looking at ESOPs also need to evaluate their capacity to manage liquidity planning. Liquidity planning, whether it is through a cash settlement or investors buying employee shares, needs careful planning and execution. Pre-planning liquidity, coordinating closely with employees, and ensuring that the right legal compliances and tax obligations are adequately and easily covered are essential elements of a good ESOP strategy.
A comprehensive ESOP management platform becomes a powerful tool for liquidity planning and can help organizations manage end-to-end processes related to such events that include ensuring ESOP appropriate planning, execution, and compliance.
Ease of Tax, accounting, and regulatory compliance
The compliance and regulatory landscape are fast evolving and are akin to a minefield. The complexity is only increasing as Global Accounting Standards are now being implemented in India. Managing these compliance and regulatory requirements needs specialized skills, something that most start-ups do not possess. Having experts managing this aspect of ESOPs is essential to help the organization and its employees quantify their tax obligations and on-time compliances.
Many start-up pivots prove that co-founders and employees are most valuable for a
start-up; sometimes, even more valuable than their product. Changing a product line may be easier than changing or building a team. In such an environment, creating a solid ESOP plan to take care of the interest of your most valuable assets not only makes good tax sense, but also a great business sense.