Drafting an ESOP is easier than you think

Written By:
Tedo Ziraga

Actually — it's much simpler than you may have thought. Though ESOP is something that the board needs to approve before you roll out, it is very important for an HR to begin the drafting process. Wonder why?

Like any other compensation and benefit plan, HR should be the one that own the responsibility of its’ sustainability. To balance sustainability and competitiveness in the market, HR is the only function that strategically understands the talent wars and employee retention challenges. So, a lot of context and objectives only HRs have a strategic view of.

Founders and Board may often be disconnected to the talent landscape, both in macro (amongst market) and within the company. It is very crucial for an HR to stand up and be the one that initiates the ESOP Draft.

OK - Where to start?

First thing first, you need to know how much of shares that board and founders have set aside for ESOPs along with its estimated value per-share. Simply ask, they know!

Now I know how many shares have been allocated for ESOP, Then What?
Cool — now we can start the exciting part. When you draft an ESOP there are three angles you need to review:

1). How does the hiring roadmap look like?
Talk to the leaders in the organization and understand what their organization may look like in the coming 1 to 2 years. By understanding what are the key hires and their ideal candidate, you can start to do the second sequence.

2). Shop around, Ask around
Now you know what type of candidate the company would need to fill in, you can start doing candidate interviews while asking the ESOP Questions. Makes sure to thoroughly record candidate ESOPs from their previous company by role, function, and titles. This would help you a lot in understanding what is the competition structure.

Do not hesitate to ask the following details:

  1. vesting period
  2. cliff period
  3. exercise terms
  4. how many have been vested
  5. how many have been exercised
  6. and what's the current price estimated price per-share

Like any other compensation and benefit element, it is crucially important to ask these questions. Now you know what's the allocated ESOP and the value of it, you can start to understand each of the competitors ESOP Value per-role.

3). Draft an allocation

Though you are not constrained by cash, but ESOP is a finite resource. meaning, when you have fully allocated ESOP you can’t just simply top it up. it's important to build your allocation and buy-back scenarios to make sure you have clear plan and control over ESOP distribution.

1). Set out a yearly allocation plan

2). Create a matrix-like pool allocation based on function and level

3). Makes sure to always maintain >30% of pool to be unallocated

4). When your allocation reach 30%, mark that as a potential buy-back event

4). Get approval from Founder
Align with your founder regarding the allocation across functions and time period. This would help you to get a green-light on how much you can allocate within this year.

5). Be on top of allocated, unallocated, and vested ESOP
Use a software like Qapita, to track and be on-top of your ESOP allocation!

Tedo Ziraga

Related Blogs

No items found.