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CAHow many ESOPs to give to your employees?
👉🏼 There are no rules set in stone to decide the ESOP payout, but the following framework could be used by startup founders to arrive at a formula.
👉🏼 ESOPs granted are typically a multiple of the annual CTC. The multiple could be 1X or 2X at the beginning of the startup to being 0.25X of the annual CTC at a later stage.
👉🏼 As an example, at the early stages (first two years of a company), they could offer ESOPs of a value 2X of CTC - which vests over a 4-year period. Now, assuming in the next 4 years, the company doubles in value - then the ESOP value will be 4X of one year's annual CTC spread over 4 years. That means, the employee has made 4 year's cash salary and 4 year's ESOPs salary over 4 years.
👉🏼 The employee is supposed to pay an Exercise Price, which may be equal to the face value of the share in the initial years (minimum exercise price allowed under law), but at later stages after a couple of rounds of funding are raised, the Exercise Price for any new joinee may be the last fair value per share because such new employee shall only be adding value above that amount.
👉🏼 In terms of annual increment, one could do something like: either take a 10% hike to the in-hand salary, or a 40% hike in ESOPs' value.
👉🏼 All of these ideas are to be thought through in sync with various factors such as stage of the company, valuation goals over the next few years, size of the ESOP pool, stocks available with Leadership, and to whom they are being offered.
👉🏼 If you get a co-founder on board after two years of running the startup and maybe after one or two rounds of raise, on an average, 2-7% may be the amount of equity in the company one may be okay giving away.
Remember, the above are only thinking frameworks and guidelines but not absolute truths. However, I hope they can be used as a starting point while structuring one's ESOPs.
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