LV NewsNavigating COVID-19

#LetsTalkESOP | Value of Startup ESOPs in Unprecedented Times

Ganesh Nayak, Director, LetsVenture

Re-energising entrepreneurial spirit in the face of adversity with ESOPs

The current crisis that companies are facing is unprecedented and has created tremendous pressure on cash-flows for startups big and small. The focus is on survival – not just for the company but also for employees.

As startups find ways to extend their runways for at least the next 18-24 months, ESOPs can offer a very practical solution. 

I spoke to a few founders (early as well as growth stage), and here are some ideas around ESOP which are actively being considered. 

  1. Some startups are offering an option for employees to take salary cuts, and receive an attractive ESOP grant as a substitute (perhaps an ESOP grant worth 1.5x of the salary cut). This cements the relationship between the employees and the company, with employees choosing to help the company tide over rough times. It also brings in a sense of ownership, a sense of being on a mission together to overcome the crisis
  2. Growth stage startups (over 4-5 years old) are creating a small “ESOP Liquidity” event to boost the acceptability of ESOPs. Even if 5-10% of the vested ESOPs of an employee is liquidated, it creates a real validation of ESOPs and helps employees with immediate cash and strengthens Point 1
  3. The challenge with ESOP liquidity in such an environment is the high discount which buyers will expect. As a founder or an HR head you can request your board to support this by providing ‘Liquidation Preference’ to buyers of employee stock or ESOPs. This will enable employees to realise better value for their ESOPs, and strengthens Point 2
  4. This is also a great time for founders and HR heads to request their boards to allocate an additional ESOP pool. A small dilution on the investors’ part will help the entire company align employees to make the company resilient until the situation is overcome
  5. We are also seeing many companies facing the tough decision of cutting jobs altogether. The retrenched employees are up against a very tough phase with hiring halted across the market. One way you can help the departing employees is to help them get liquidity for their ESOPs (if they hold any). 

There has never been a better time for startups to leverage ESOPs to re-energise & strengthen the entrepreneurial spirit across the organisation and for investors to put their money where their mouth is and help entrepreneurs and their teams address these challenging times!

If you are a founder / board member / HR head or CFO, please do connect with me – We will be happy to share our learnings and brainstorm other possible solutions with you. 

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