Negotiating ESOP: How Much ESOP Should You Ask for from a Startup?

Amidst the fresh blooms of spring, the Startup Economy is rejoicing, as the funding and jobs forecast for the upcoming financial year, 2023-24, is nothing short of delightful. While the harsh winters had taken a toll on employees and entrepreneurs alike, the gradual improvement in the economic condition is a welcome relief. Adding to this pleasant news is the announcement by TCS and a few other corporates who are now actively seeking to employ talent from Startup companies, who were unfortunately laid off during the brutal winter season of 2023. 

Also Read: How to avoid failing your startup idea? 

Employment Opportunities in 2023-24

Get ready to witness a surge in this trend, as a vast majority of corporates, unicorns, and Startups are set to receive freshly allocated budgets, growth funds, and, in some cases, seed funding by April 2023. This influx of capital will undoubtedly pave the way for new opportunities. Therefore it's safe to say that the Startup ecosystem is brimming with excitement for what the future holds. 

Also Read: Shubh, Laabh & Startup! 

As the season of rejuvenation and growth, spring can bring a plethora of exhilarating opportunities for talented leaders. Many Startups, as well as unicorns, are eager to provide their top-notch talent with the perks of Employee Stock Ownership Plans (ESOPs). However, professionals must be well-versed in the art of negotiating a favourable ESOP deal. Often, individuals are hesitant to ask for what they truly deserve, fearing rejection, or they may even overestimate their worth, making it difficult for a Startup to comply with their demands. 

To shed some light on this topic and empower all the talented people out there, here's an insightful piece that you won't want to miss!

What's a Fair ESOP Deal? Here is Your ESOP Calculator 

According to Pushkar Singh, Partner TREMIS Capital (www.tremis.in) a Startup Advisory and Investment consultancy based in Gurgaon, 

“Joining an early-stage Startup as one of the first senior hires can be a promising opportunity, but it can also be daunting when it comes to equity negotiations” 

He further explains how the ESOP works for Startups, top employees, and VCs. 

Also Read: Hog & Heist; Regulate Before Its Late! 

Evaluating ESOP Proposals: How to Negotiate the Right Amount

To determine how much equity you should ask for, it's essential to understand the math behind ESOPs. 

• If you find yourself in such a position, where the founders offer you 0.5% equity through Employee Stock Ownership Plans (ESOPs), vested over three years, you may wonder if this is a fair offer?
• Typically, when founders raise capital from venture capitalists (VCs), VCs require an ESOP pool to be created to allot shares to employees in the future. 
• An ESOP pool dilutes the ownership percentage of existing investors by creating new shares.
• The rule of thumb is to create a 10% ESOP pool, and most Startups use this pool over two to four years.
• Suppose you are among the top five to six early hires in the company, and you are offered 0.5% equity through ESOPs. 
• In that case, you can negotiate for 1% equity as fair compensation. 
• The Startup can allocate 1% equity to each of the top hires, keeping the remaining 4% for the next set of employees.

If the Startup does well, these ESOPs can be worth a significant amount of money. Therefore, it's crucial to choose your equity compensation wisely, as even a difference of 0.5% or 1% can mean a substantial difference in the value of your ESOPs, potentially ranging from $1-2 million or more.

Remember that ESOPs come with a vesting schedule, which means you won't get everything at the time of joining. The Startup will issue these ESOPs in a staggered manner over three to four years. So we wish you the best for all the opportunities ahead in 2023-24.

Read More: Startup India: Incubator, Seed Fund, VC, Unicorn Guide