Ever met someone who made generational wealth by working hard and saving money? No? Neither have we. 🤷‍♂️
Two gospel truths to internalize: 1) The only way to become wealthy is via ownership in companies. 2) Paying for a blue tick is lame (don’t @ us)
Setting the sass aside for a moment, if you are currently evaluating a job offer and are wondering if you should ask for ESOPs as part of your compensation: the answer is a table thumping yes! Owning shares in a company that values your contribution sets not just the right incentive, but gives you an incredible shot at becoming incredibly wealthy.
But hold your horses. It’s important to note that not all ESOPs are created equal. In fact, some are downright terrible and you could end up with the short end of the stick.
There are a bunch of things to consider, from vesting periods to the cost of exercising them. It could be overwhelming if you are new but fret not, we’ve got your back.
It’s time to demystify and evaluate. So, grab a pencil and let’s get started.
Parameter 1: Who gets ESOPs?
A good ESOP policy is one that is uniform. If you have ESOPs and your cubicle mate doesn’t, the chances of you two seeing eye-to-eye on long-term growth plans are slim.
That's why we're big fans of an inclusive policy that benefits everyone - employees and employers alike. For, when the goals, actions, and incentives are aligned, everyone starts to treat the company like their own. That kind of collective ownership and pride will lead to incremental benefits down the line.
And yes, it is absolutely ok to ask your hiring manager if ESOPs are given to all employees who join.
Scoring System:
Ad-hoc ESOP allotment - 1 Point
Top hires and key people - 2 Points
Well-defined allotment (performance, business results, seniority band etc.) - 3 Points
Add 2 bonus points if the company offers ESOPs to everyone!
Parameter 2: What’s the vesting period?
Being awarded ESOPs does not immediately give you the right to gain from them even if the company decides to do a buyback. Given that they are seen as tools of long-term retention, they vest over a period of time, meaning you get the right to buy and sell them only after you have been with the company for a specified period.
A typical vesting schedule is four-years-long, with a one-year “cliff” and monthly or quarterly vesting after that. We have seen good companies keep the vesting schedule equally weighted wherein 25% options vest each year.
Scoring System:
5 Years or more - 1 Point
4 Years - 3 Points
Less than 4 years - 5 Points
Parameter 3: What is the exercise price?
This little number can and should make or break the deal between you and the company.
The exercise price determines how much you pay when exercising your options i.e. buying company shares in exchange of your vested options. If set at current share price, it will significantly lower your eventual gains.
A good ESOP policy sets its exercise price at a nominal amount or at face value, which is the initial value of the company’s stock during incorporation.
Scoring System:
Current share price - 1 Point
Reasonably lower than share price - 3 Points
Face value - 5 Points
Parameter 4: What happens to your vested ESOPs after you leave the company?
If you lose the right to exercise your vested ESOPs after leaving a company, that's bad. Like, really bad.
When you're evaluating your ESOP options, pay close attention to how long you'll have the right to exercise them after you leave the company. You don't want to feel like you're stuck in a prison of missed opportunities when you're trying to create wealth.
A good policy allows you to retain your vested options and hold on to them for 10 years or longer. Short exercise windows post exit is a red flag.
Scoring System:
Clawback after leaving: 0 Points (THIS IS BAD NEWS!)
Available irrespective: 3 Points
Parameter 5: How long would they be available after quitting?
How long is too long, you ask? Well, while we all would love to have an eternity to exercise our vested ESOPs, some countries have set limits. In India, the longest period you can exercise your ESOPs after quitting is 10 years, which is further extendable at the discretion of the management.
Now, we all dream of the day our company goes public and we can ride off into the sunset with our bags of money. But did you know that Indian companies take an average of 18 years to go public?
Keep an eye out for the post-exit exercise window in your ESOP agreement, it could well be the distance between your and your financial freedom!
Scoring System:
30 to 90 days - 1 Point
Up to 1 Year - 2 Points
1 To 3 Years - 3 Points
Upto 10 years - 5 Points
Parameter 6: Are your ESOPs time-based?
We have already spoken about who gets ESOPs and how long it takes. But what if your options are linked to your performance rather than becoming available to you over a fixed period of time?
We’d recommend against taking it up for the definition of success and goalposts at startups are constantly evolving, making it a subjective matter.
However, there are companies that offer both, wherein options granted initially become available to you over time, while good performances give you the opportunity to earn more grants on top of that!
Scoring System:
Performance-linked - 0.5 Points
Time-based- 3 Points
Add 2 bonus points if a company offers both
Parameter 7: What is the ESOP pool size?
A larger ESOP pool shows the founders’ willingness to share financial rewards with those who are invested in the company's success. This is a good metric not only from the perspective of ESOP evaluation but also tells you about the kind of culture you are walking into.
It is not a norm to provide such details in the offer letter, so it’s good to have this conversation during the hiring process. These days most reputable VCs ask their companies to have a pool size of 10%
Scoring System:
< 5% - 1 Point
< 7.5% - 2 Points
< 10% - 3 Points
> 10-15% - 5 Points
Parameter 8: Have it down on paper
Do you have a clear idea about your ESOPs, or is it just a vague promise? If it's not in writing, it holds no value.
Fortunately, there are some startups that are doing it right by using platforms like Infinyte Owners to communicate with their employees about the true worth of their ESOPs. This not only makes the process more transparent and equitable but also ensures that everyone is on the same page.
Scoring System:
Verbal offer: 0 points
Signed, written offer: 1 Point
ESOP Portal: 3 Points
Parameter 9: In the event of an acquisition or an exit, what happens?
Let’s assume the startup is getting bought and much of your allotted ESOPs are unvested.
Accelerated vesting (speeding up the process of vesting and exercising) in such cases shows how much the company truly cares about wealth creation of its employees.
Scoring System:
Only vested options: 1 Point
Accelerated vesting: 3 Points
Parameter 10: Does the company regularly facilitate sale of ESOPs?
Not all startups have this in place, especially the ones just starting out. But for established or growth-stage companies, facilitating the sale of ESOPs shows that the founders believe in the value of their employees and want to see them succeed.
It's a clear sign that the company is financially healthy and trustworthy, and that your hard work is valued.
Scoring System:
Sale not facilitated (Through buyback or sale): 0 Points
Sale or Buyback available: 3 Points
What’s a good score?
So, you've got your ESOP score. But let's not stop there - we can help you evaluate even further:
Score under 15: Uh-oh, that's not looking great. But don't give up hope just yet! Try negotiating some of the terms where they scored 1 or below and see if they're willing to make some changes.
Score between 15 and 25: Not bad, but definitely some room for improvement. Take this as an opportunity to have an open conversation with the company and suggest some changes. Who knows, maybe they're open to negotiation and you'll end up with an even better deal!
Score above 25: This is what we like to see - a good ESOP policy. But remember, not all points are created equal, so make sure to focus on the ones that matter most to you based on your career and life goals. And don't forget, the highest possible score is over 40, so there's always room for improvement.
Phew, that was a lot of information to digest. But when it comes to building wealth, taking the time to evaluate your options now can save you a lot of headaches down the road.
We're rooting for you, future millionaire!
