Executive HR Insights: An ESOP Attracts Star Players – and Keeps Them in Your Court

Tech startups only succeed with first-rate tech talent – and it takes more than a risky
proposition and starting salary to attract the very best. Exciting as the startup environment can be, adrenaline won’t sustain your best players for long. Your employees will come – and stay – because they want to build meaningful careers and financial futures. Just like you.

Offering rewards for long-term commitment will help balance the sense of risk a sensible
applicant must consider before accepting a startup position. One of the most compelling
rewards? Equity. Offering equity in the company gives you a crucial leg up in attracting and
retaining the best and brightest talents in the field. Equity demonstrates your seriousness as an employer and founder, because you, too, have stakes in your organization’s longevity and profit.

Equity can transform your administration, staff, and corps from a personnel chart to a passionate team.

An ESOP – Employee Stock Ownership Plan – can take different forms, and it’s important to understand which to offer and why. Potential employees certainly will do the research, as this kind of corporate benefit has become attractive and common. According to Business Wire, a 2019 E-Trade survey documents that 57% of workers under 35 view stock benefits as a “highly attractive” reason to accept a job offer. The same survey shows that this demographic can be uncertain about how to actualize these benefits – but that was four years ago. Bright young workers learn fast. Keep up!

Equity packages come with various costs, risks, and ultimate profits for the employee. Some offers can appear devious or put your employees in a poor position to exercise. Others put your hired talent on strong footing, invested in the company’s development and long-term success. Make sure you know what you’re offering, take time to understand the implications, and make certain your employees do too.

The most common forms of employee equity compensation tend to be variations of stock options or restricted stock units / awards. Startups, as well as established companies, can choose creatively to offer tailored equity benefits.

• Stock Options: Your company may offer employees a right to buy shares at an
  “exercise” or “strike” price – that is, at a specified cost that remains stable regardless of public market motion. Offering options at start-up can be valuable for you and your employees; options motivate every member of a new company to work toward growth and success. Your employees can purchase stock at the strike price in increments you negotiate at hire. The contract may include a deadline for purchase may be contingent upon progressive milestones. Employees stand to profit handsomely if the market value rises above the fixed strike price
• RSUs (restricted stock units): this form of compensation can come as earnable units (hence the “u” in RSU), or as restricted stock awards. “Restricted” means that the stock may not be sold until a specified vesting point.

Restricted stock awards are delivered outright, usually upon the employment date, granting the owner rights and privileges as a shareholder – including voting at shareholder meetings and profiting from dividends. The company may reserve the right to buy back unvested award shares if the employee departs.

Restricted stock units are founded on the employer’s promise to grant a specified number of shares upon designated future dates, contingent on employment milestones. Once the RSUs are exercised, the owner acquires standard shareholder rights. There may be continued restrictions on selling unvested shares, depending on the contract.

The benefits of offering equity plans lie in their versatility: employers can craft equity packages that draw top talent while a new company is focusing on establishment; plans that motivate novice achievers to learn and grown with the company; plans that help retain highly competitive stars in their professions. Highly skilled workers expect real rewards beyond the standard payroll – as they should. Equity plans attract – and keep – the talent in your court.

Resources:

https://www.investopedia.com/ask/answers/061515/what-are-restricted-shares.asp 
https://www.investopedia.com/terms/e/esop.asp 
https://gusto.com/resources/articles/hr/team-management/4-benefits-offering-stock-options-employees