First the basics:
- Esops are 'shares' that are given to employees in new gen Companies.
- Esops have many flavors. The (only) type my group hands out is:
Now, this as far as the Concept and functioning of ESOPs.
My Open Question here is - WHAT SHOULD BE THE BASIS OF ESOPs?
- When really senior management comes on board, they usually negotiate a fixed % of the Company as the ESOP.
That's because, in their minds they project - lets assume the Company sells for 100mn US$ and they own 1%, then they will walk away with 1 million $$$.
Probably 'WORTHWHILE' for a 35 year old to quit a 9-5 job in Yahoo! and jump on 'coz he just gets a kick out of earning 1 million US$ that he would not get anymore at Y!
- For the JUNIOR and MIDDLE MANAGEMENT, how does one structure the ESOP grants such that:
The grant given out is:
- VERY EASY to Communicate
- MAKES AN IMPACT - it's almost saying "we will pay you 'X' - that 'X' being a tangible value
- AFFORDABLE to the company?!
As a simulation,
Let's assume that an Internet Company generates a topline of 10 million US$
Since, it's an Internet Company, it will be probably valued at 50 - 70 million US$ ( 5x - 7x of topline)
Let's also assume that its ESOP pool is 10 % (standard)
So, if the Company does get sold, then 5-7 million US$ will be distributed to employees.
Now, with a 10 million $ topline, its salaries are probably 3 million US$ a year.
Reduce salaries of top management etc (they are founders etc), and you are left with 2.50 million US$ a year.
Also assume that it takes 5 years of hard work for the Company to reach where it is.
Take out 1 year of the effort put in to remove the Cliff.
So, we are left with 4 years of Salaries * 2.5 million $ per year = 10 million dollars PAID OUT
The LEAST the ESOP payout should be also 10 million? (least)
So, the Company should have sold AT LEAST for 100 million $$$?
If so, then you can promise employees - By the time you leave the Company, you will earn what you earned in the job ALSO AS ESOPs!
If you look at the delicate balance of this equation:
The Sale Price of the Company as a function of the Employee salary is really the CRUX!
And that really NEEDS to be communicated every passing day to the employees. That their contribution in the Company can earn them their salaries ALL OVER AGAIN - if they build value!!
Undoutedly, when a Company becomes very valuable very fast (facebook, yahoo!, google, Infy), then its founding team members get VERY VERY RICH. But that's a rare case.
This discussion is to probe - what happens to Companies that are moderately successful?
And WHAT should be the quantum of MONEY earned by employees when they SELL their shares.
Finally, this discussion is to DEBUNK the cheap sales tactics of some Companies who fool their employees by telling them "Wow, you are getting 10,000 shares" or "You know what, your shares are priced at 20% lower than the market price"... etc etc BS.
Oh, there are Companies that DON'T give Esops!! I wonder who works for them?
I have seen many ESOP Plans.. the truth is that 90% are junk value.. it's either because they have no value or no real guiding principles but are show value. I call them all "Toilet Paper"
But at 2win employees have benefited in past and will in Future.
@ Satish - I am quite sure.. 2 Win is in the 10% category. The above article says it all...
How about incentives ... Alok, it will be great if you can write a post on this.... I worked for a company for my 5 years, I was the first employee ... gave my heart and soul ... always expected it to make me few millions ... the company grew, reached the million stage as well but somehow I wasn't seeing the gold .. I left the company ... but now I own a company and now when I expect my team members to give their heart and soul to the company's development, what incentives can I give and how ...
How are different companies compensating people ... Earn the share, earn the incentives ... what all methods are there?