What are ESOPS in Startups and How Thy Work?

One of the biggest challenges for startups is to find enough funds to keep the business running. Big or small, every business at some point needs some capital to function. If you want to scale your business up and expand your services, it will cost you a sizable amount of capital. One way to raise capital is to ask for loans from friends, family or financial institutes. If you mix those funds with some of the revenue you are generating, you can get enough financial fuel to keep going on.

But if you want to scale up quickly and leverage on a trend, you need larger capitals in shorter times. Founders are often open to selling some of their company’s stake for a substantial amount. Despite the raised funds and ongoing revenues, it is a standard practice to keep your costs low and to operate at a minimal level. One very effective way to shrink the costs is offering ESOP to your key employees.

Origins of ESOPs

ESOP stands for Employee Stock Ownership Plan. By offering your employees ESOPs, you are offering them a certain stake in ownership. This keeps them more engaged towards your company and offers a better incentive than the regular sales driven ones. The origins of ESOPs go way back in the 1950s. Lately ESOPs have also been an effective way to offer minimal operational salaries and better incentive based ownership plans.

The first ever ESOP ecosystem originated in Silicon Valley back in 1956. A lawyer named Louis O. Kelso created an employee stock ownership plan for Peninsula Newspapers Inc. This was an era much before the world of website development existed. in San Francisco. Kelso believed that after the founders, it should be the core employee group of the company that should take the reins.

Benefits of ESOPs

There are some key benefits to offering ESOPs to the employees. Apart from cost cutting, it also boosts the trust factor between the company and its employees. Here are some key benefits of ESOPs.

Transferable

ESOPs are transferable. This means that an employee can cash in for the entire of their ESOPs or a portion of it to leverage on the market price. An employee can choose to retain the ESOPs after leaving the company as well. This makes the whole practice very flexible.

Trust

By offering ESOPs to the employees, a company builds a very honest equation with them. Having a sense of ownership enhances the trust factor between its key employees and the promoters. Knowing that any move will affect the incentives of the entire hierarchy ensures that all the proceedings remain transparent and honest.

Efficiency

Motivation or the lack of it has been a key factor in defining the growth of a company. Employees after some time get accustomed to the staple work life and have little motivation to push themselves. Knowing better performances will result in higher remuneration through the share prices acts as an added incentive. It also drives the employees to work in a perfect synergy and with an improved efficiency.

Cost Cutting

Lately many startups have identified that some key employees can reform the company they have founded. To lure them to stay with them for longer, founders often offer moderate salaries that just match the industry standards but top it up with generous ESOPs that attract top talents. This way companies don’t end up overpaying in order to acquire the best talent and they only pay more if they earn more.

There are more intangible benefits of ESOPs than tangible ones. The environment of trust and synergy can affect how startups get funding. Any new investor sees the culture at the startup before investing and having everyone on the same page can really fasten a company’s growth.

Creating a vibe at a workplace is quite a task today. With a majority of the employees working from a remote setting, there are many ways with which you can bloom your business. ESOPs are one of the best ways to ensure longevity in your success and add a lot of camaraderie within your human resource. 

Conclusion

ESOPs are a great way to share your burden and fasten your growth. If distributed wisely, these stock ownership plans can take your work culture to a next level. It is evident that a great unicorn company was once a startup with enthusiastic founders and really talented employees. Startups often fall behind in talent acquisitions as they don’t have the financial muscle to beat their competitors. For all those struggling beginners, offering generous ESOPs can help them in not just acquiring the right talent but also to retain them for the long term.