ESOPs for dummies

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With the scope of startups increasing day by day in India, universities are seeing increasingly more startups coming down to hire. Even with the startup image taking a hit with the Flipkart and Grofers hiring fiasco, startups remain amazing places to work at. There is no substitute for the steep learning curve and work culture (no suits and formal wear, yay) that they have to offer.

If you are sitting for placements, chances are that you are going to end up with a job offer from a startup and there are going to be several things that go right above your head (mine included, back in the day). Let’s fix that by outlining a few things that you should know before sign on the dotted line.

Founder and Team

If you are applying to an early stage startup, the team will consist of the founders and a few teams members (interns, consultants, VPs et al). It makes for a pretty small workplace with a heavy influence of the founders’ ideologies on the culture.

It’s pertinent you find out about the founders’ views and vision before you join a startup. Research their past work experiences and ventures (if any) and don’t hesitate to ask questions on how they see you fitting into the team. A fallout with the founders or a culture mismatch won’t end well for either party.

Role and Career Growth

Your role will undoubtedly be discussed in detail with you before you join. However, as startups go, job roles are flexible. Startups are all about burning needs and about getting a job done.

Discuss your job expectations and how they see you fit into the growing needs of the startup. Will you be leading a team sometime down the line? Will you transition into a new career role or will be handling the same a year down the line? Will you be called upon to do things not strictly within your job description?

It’s best to leave nothing to question when discussing your role to avoid an unsavoury conversation 6 months down the line.

ESOPs

Employee Stock Options (ESOPs) are a great way for startups to create a sense of ownership to every member and providing adequate compensation to their employees with no outward cash flow.

If you are applying to an early stage startup, a major chunk of your salary will be your ESOPs. The amount of ESOPs startups award to their employees is a function of their role in the initial growth.

Early stage employees are awarded their compensation mostly in equity whereas further down the hierarchy it’s more about the cash-in-hand.

All ESOPs are awarded to employees at a strike price, a price set on the stock option by the startup itself. Note that the strike price of a stock option is not the same as the stock price, a price determined by the number of shares of the company available in the market and the valuation of the startup. When you exercise your stock option, you get the stock price for your ESOP.

“The difference between the strike price and the stock price, gives you the intrinsic value of the stock, i.e the money you make by selling your shares”

However, there are a few conditions for exercising your stock options.

Vesting Period

When you join a startup, you don’t get to exercise all your ESOPs at the time of joining. You receive the right to exercise your stocks in periodic instalments determined by a vesting schedule. You will be able to exercise your full ESOP at the end of your vesting period.

The minimum time after which you can vest the first chunk of your ESOPs is called a cliff. Leaving your job before the cliff means that you don’t get to exercise any of your ESOPs.

Salary Breakdown

The number you see in your offer letter will be split into smaller components. While most of it you will receive as cash in hand, some of it will be allocated for very specific purposes like housing & rental allowance, healthcare, provident funds etc. Some of these are pretty self-explanatory like the housing & rental allowance (referred to as HRA) while others are ones you won’t be accessed directly from the provident fund.

There is no one salary breakdown that can be applied to every employee contract, but before going with whatever the startup asks you to sign, you’d be better off having it reviewed by a Chartered Accountant of your own.

The Fine Print

On the off chance that something doesn’t go according to plan with a startup, your stocks might not be vested fully when you find yourself without a job or you might want to quit before your vesting period has run its course. In such cases, it’s better to have an idea of the fine print.

Non-Compete: Signing a non-compete is a clause under which you agree not to enter into or start a similar profession or trade in competition against the startup you were working for. Most Non-compete clauses stand for a certain period of time. Ex. 6–12 months.

Drag along: drag-along rights come into play in case of a startup acquisition. It allows a majority shareholder (founders and investors) to force a minority shareholder (you) to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms and conditions as any other seller.

Accelerated Vesting: Another part of your employment agreement that will change with a merger or an acquisition is your vesting period. Ideally, it should accelerate, so that you have the option to vest your full ESOP when your startup gets acquired. This should be obvious, but it’s better to have yourself covered in case the startup goes kaput.

Knowing these, you have all of your bases covered on the amount of equity you will be entitled to when you will get it and the kind of money you will be making if you end up joining the startup.

Armed with all this new knowledge in your posse, you can now confidently sit for a startup process knowing your stuff. If you are looking to intern/work at a startup, you can get step-by-step guidance from a current employee of top startups like Uber, Tinder, Flipkart and Snapdeal on TapChief.

Sign up now to get a current employee from a top startup to help with your internship application.

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