5 Questions to ask when considering an ESOP
An employee share option plan (ESOP) is a valuable benefit for employees, giving them the opportunity to become shareholders in the company where they work. Essentially, it allows employees to purchase company shares at a predetermined price, typically established when they first join the company. Once they fulfil specific conditions, like remaining with the company for a certain duration or achieving performance milestones, employees can exercise their ESOP and buy shares. This program not only rewards employees for their commitment but also fosters a stronger sense of ownership and engagement in the company’s success.
You should ask the following five questions if you are considering joining a company that is offering an ESOP program:
1 . Equity Check: Does the company give out ownership shares to employees already? Ask about how they decide to share ownership. This helps you see if they value giving ownership to staff. If they have a solid plan for sharing ownership, it shows they’re serious about fairly paying employees. Knowing this can help you feel more confident and compare their offer with what others in the industry offer.
- Equity Allocation: How does the company determine the amount of ownership shares given to employees? Is it decided case by case (typical for very new startups) or is there a clear system in place (like equity representing a percentage of your fixed salary based on your job level or role)? Understanding how much equity you’re offered can help you view ESOPs as part of your overall pay package and compare it with market standards for your role and location.
- ESOP Value: Ask the employer how they determine the dollar worth of your ESOP grant. Look at it in terms of its dollar value and the percentage of ownership in the company it represents. Like with determining the amount of equity (quantum), do some research to compare this offer with what’s typical for similar roles in other companies. Generally, if you’re joining the company early, especially before or as it starts getting external funding, you might receive more equity. However, it’s not just about being there early – think about how much you contribute to the company’s success.
- Vesting Schedule: What’s the plan for when you’ll get access to your ESOPs? Will you have to wait one, two, three, four, or more years to fully access them? You might be familiar with the common 4-year vesting plan, starting with a 1-year cliff then monthly afterward, but don’t assume the company will follow that exact schedule. In some places, companies aren’t required to stick to a minimum vesting period, so they might have their own unique schedule.
- Access to ESOPs: After your ownership shares become available, what options do you have for using them? How easy will it be for you to sell them? Are there automatic processes in place, or will you need to start the sale yourself? Are there specific times when you can sell them easily? If the company isn’t publicly traded, will you have to wait for a big event like selling the company or going public, or does the company offer ways for you to sell them, like buying them back? If you plan to sell your ESOPs later, will you have to get approval from the company beforehand? And will there be times when you can’t sell anything at all? This might vary depending on how high up you are in the company. It’s good to think ahead and find out about any extra rules on selling or moving your shares.
In conclusion, an ESOP is a valuable incentive for employees, providing them with the opportunity to invest in the company they work for. Not only does it reward their dedication, but it also cultivates a deeper sense of ownership and commitment to the company’s success. When considering joining a company offering an ESOP program, it’s crucial to ask pertinent questions to ensure a clear understanding of the program’s mechanics and implications. By inquiring about equity distribution, allocation methods, ESOP valuation, vesting schedules, and access to shares, individuals can make informed decisions regarding their participation in the program. Taking the time to gather this information empowers prospective employees to assess the true value of the ESOP offer and align it with their career goals and financial aspirations.
