ESOP percentage for early employees
Let’s say you join an early-stage startup as one of the first senior hires. You are part of the core team. The startup has raised some Venture Capital from angel investors or syndicates, and it has launched an MVP. It recently started making revenue and is hiring senior industry people for key roles. You are one such person.
The founders own 90% of the equity and the angel investors own the remaining 10%. The founders offer you 0.5% equity in the form of ESOPs (Stock Options) vested over 3 years. You are in a dilemma. You don’t know whether this is fair or not.
How much equity should you ask for?
Let’s understand the math. When the founders go to VCs to raise capital, VCs ask them to create an ESOP pool. An ESOP pool is a mechanism for allotting shares to employees in the future. You can think of it as new shares that the company will issue to its employees in the future. The ESOP pool dilutes (reduces the ownership percentage) the existing investors because it creates new shares.
VCs insist on making an ESOP pool before investing because they don’t want this dilution to affect them. A 10% ESOP pool is the rule of thumb. So, if the startup has 1M shares, it will issue 110,000 new shares under the ESOP. The management will give these shares to its key employees as an incentive.
Most startups use their first 10% ESOP pool over 2–4 years. Once these ESOPs are exhausted, the board issues additional ESOPs for new employees.
Now if you are among the top 5–6 early hires, what should be your share of this 10%?
I suggest asking for 1%. The startup can give 1% each to these 5–6 key people and keep the remaining 4% for the next set of employees. It will hire the next group of senior employees after raising capital from VCs. These new employees will get fewer ESOPs (0.25%-0.5%) depending upon their role and time of joining.
Thus, if you are amongst the first 5–6 key hires, 1% is fair compensation. You will get this over your fixed salary, and these ESOPs will have a vesting schedule. Vesting means you don’t get everything at the time of joining. The startup will issue these ESOPs in a staggered manner over 3–4 years.
So, if the startup gives you 12,000 ESOPs, you will get 4,000 after every year for 3 years or 3,000 after every year for 4 years. If the startup does well, these ESOPs will be worth a lot of money. Hence, you should choose wisely because 0.5% or 1% can mean a difference of $1–2M or more.
What AI can’t replace -
- Ability to make a sale: till the time the purchaser is also a person. There’s no bearing person to person interaction & negotiation to close a sale
- Ability to move things: Last mile physical movement will remain highly customised. Logistics of physical goods will be optimised using AI but the physical act would still need human intelligence and heavy lifting
- Ability to pivot: Narrow use case AI will mostly optimise within the given rules. The ability to see the bigger picture & forecast a change shall still remain human. The World operates as a second order chaotic system (that reacts to a forecast unlike weather)
- Ability to gain credibility: with AI scanning through random information sources without validation or ,worse, it does so triggered by a paid promotion, a person who does thorough research & disseminates information that is mostly accurate will gain credibility (only the truly credible will survive & mediocrity will be pushed out)