Esops can change your life. They are probably the most valuable contribution that Startups make to the lives of employees who suffer low salaries and long hours while working in new Companies. However, ESOPs as a concept is confusing and complicated and needs to be understood well.
This is a humble attempt to demystify ESOPs.
Hope this was helpful! Please provide feedback!
– Lets assume that you have invested 400 hours into the project
– Lets assume that your market value is US$ 25 per hour
– You state that you have invested 5000 US$ into the project
Therefore the ‘capital’ invested into the venture by you is = (400*25) + 5000 = US$ 15,000
– Now let’s assume that your friend puts in 500 hours in the next few months
– His value in the market is US$ 30 per hour
After he has put in his hours, the ‘capital’ invested by him will be US$ 15,000
Total Capital of the Company now will = US$ 30,000
Both of you will therefore own 50% each.
– Lets assume that you also continue to contribute while he is involved
– Lets assume that you add another 200 hours
Your capital invested in round 2 will be = US$ 5000
Total Capital created will be 15K + 15K + 5K = 35K
Your share will be 20/35 = 57.15%
Your friends share will be 15/35 = 42.85
This formula can be used to add capital to the pool and reward the contributors (be it via cash, effort, employees (the amount they DO NOT take home in cash) etc.”