Esop Vesting

When founders lay the basics for their startup, an equity-based compensation plan is often being set. Allowing your key employees to enjoy a financial profit that is based on the success of the company, is considered to be extremely beneficial for both the company and the employee.

The hired talent may gain a significant amount of money and partial ownership of the company. The owner that is probably short on money at the moment, doesn’t have to spend immediate funds in order to recruit, he also enjoys an employee that is vested (no pun intended) in the company's success.

Although it sounds like Employee Stock Options Plans have one simple approach, there is a tricky part. After creating a dedicated stock options compensation pool, this is the time to fully understand what vesting triggers there are and decide which are the best for you. Don’t worry, that is what we’re here for, we will show you the top three plans often offered and explain their ups and downs. Shall we begin?

Timeline-based compensation
The most common and often what people imagine when the subject of stock options comes up. This scenario gives the employee a set amount of unvested options that will mature over a time period, and only as a result of him providing a specific service (such as being an employee or a consultant).

A plan of this kind typically offers the first vested options after a long period (Cliff), and then reduces the vesting period as time goes by. This is the company’s way to ensure only long-term employees will enjoy the opportunity to become a part of the shareholders. This timetable also helps keep the talents at hand, they will refrain from looking or signing with other pursuers as they expect significant gain up ahead.

One major CON this plan has is that it doesn't differ between the hard-working and the ordinary. Every employee who received a stock options plan will eventually have the opportunity to purchase options, so some might take advantage of this fact and won’t put significant effort into their work. Companies usually have employees who give 160% and others that never reach a 100%, both will eventually receive the same.

Performance-based compensation

If you are a believer in KPIs (Key Performance Indicator) and Milestones this is exactly for you, it defines a pre-allocated amount of stock options that will gradually vest with each goal reached. Often offered to people specializing in sales, this is a great way to defer the good from the best as it allows only those who reach certain determined goals to become an actual part of the stockholders. Take all the time you want, if you don’t shine you won’t dine.

This is a great way to inspire some of your employees to go the extra mile, it sends the message that their hard work will be recognized and compensated. Another great PRO is its flexibility, there are no pre-set definitions or milestones so you can just pick whatever goals seem reasonable and vary them with each new employee.

The CON might seem significant to some and not important to others but nonetheless, it exists, sometimes pushing a person to your goals might give them a nudge towards the door. Not everyone likes to add stress to their work, and some will prefer to look for a job with a different compensation method.

Furthermore, if the milestones aren’t set properly, a person might be able to acquire stocks within a short period of time. Seeing a person succeed quickly may cause certain people to “fight” their teammates in order to gain success resulting in a hostile work environment.

Company goals-based compensation

Simply speaking, this method means: If we make it you make it. An employee (often an executive) is given stock options that will vest altogether in a case of a constitutive event such as an Exit, a funding investment, Share price, etc. here the actual vesting stage is not directly influenced by the actual worker. He might work for the company for six long years without having any vested options, or it might go the other way around, just started working and having many vested options because the company surprisingly had a big change.

An interesting example of this type of vesting scenario can often be seen in pharmaceutical companies. They tend to offer their managing staff a company goals-based compensation in the case of an FDA approval, which gives an extra boost to the employee’s involvement in the day-to-day goals, and on the grand scale.

The PRO here is actually also the CON, on one hand, there’s no separation within the options plan, no milestones, or a timeline. If the company won’t succeed in the future the employee will be a part of it, he will have nothing, so technically a founder can give compensations that will cost him absolutely nothing. On the other hand, this might cause a buy-in from a person who recently started working in the company. his commitment towards the company hasn’t been tested yet, more to that is the fact that he will have a significant amount of stocks compared to the time and effort vested in the company.

So what is the best option?

We can advise, but it is up to you to choose what suits you best. Try imagining what you’d like to have if you found yourself standing in the recruited shoes, think what will benefit your company the most and what is the preferred way to achieve it. After answering these two, we believe the answer will be obvious.

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