What I wish I knew about ESOPs
Personal Notes for Later Reference
These are notes for my future self, and so it’s not necessary that it should apply to you.
If you are not familiar with the terms in this 1 pager, read them here: https://zenequity.com/blog/esop-glossary-breaking-down-the-esop-jargon/
10
More than the actual amount of ESOPs, the percentage of the total ownership in the company is what you need to care about — specially at the seed/Founding stages, since your ownership will anyway get diluted.
9
Consider exercising your options and converting them to equity on the day they vest itself. You are taxed on the difference between share price and strike price. Do not wait, because as your company’s valuation increases, your tax liability increases.
8
The vesting schedule, number of shares, and exercise window and Non-Compete Clauses of your offer letter should come with the CTC. If they’re not mentioned, ask for those details.
7
If someone offers you a vesting schedule of 10%-20%-30%-40% every year, that’s less than ideal. A good ESOP plan is closer to 25%-25%-25%-25%. Negotiate on this.
6
After the first year, your vesting schedule should ideally be pro-rata i.e. vested monthly in fractional options — if it’s anything worse, negotiate on this.
If there is a pay cut, and ESOPs are issued in lieu of the cash, ask for accelerated vesting. If the founder/startup refuses, start looking for a new job. Don’t work for idiots.
5
If the exercise window is less than 4 years from date of resignation, that’s a major red flag and indicates lack of self-confidence from the founder. Don’t work with greedy cowards.
4
If a founder/team refuses to negotiate, walk away — if they can’t negotiate with a prospective employee, they will not be able to negotiate with other parties e.g. people who buy your software and people you buy software to do your job well.
3
RSUs of publicly listed companies are in many ways better, because the share price, your tax liability and how you convert them to cash is pretty transparent.
2
It’s exceptionally hard for an engineer to financially justify working as a founding engineer without ESOPs which compensate for the opportunity cost of working for a BigCo.
Give the choice between a bad ESOP deal, and a BigCo with decent cash comp— almost always work for the BigCo.
And since you’re bullish on the team, invest your cash as an angel in the startup for the returns instead :)
1
At the risk of over-simplification, these are good cliff notes on what you should aim for.
The Primary Rule
For the most part, assume that the value of your ESOPs is zero. But negotiate like it’s part of your cash compensation itself.
Why? Because that’s the way the founder/startup is looking at it, it’s literally part of Cost to Company for this reason!
Thanks to Kuldeep Dhankar, Madhur Chadha, Hardik Pandya and Mannan for multiple Clubhouse conversations which shaped my thinking on the topic.