Typically businesses set up an employee share ownership plan (ESOP) sometime between pre-seed and early VC stage. When possible, it’s best to communicate options packages as a £ based value on the current valuation (rather than as a percentage of ownership in the company).
Options can have material tax consequences for employees – which need to be understood by both the new employees and also the company itself.
Several tax treatments of the options granted include: taxable event upon grant, taxable event upon leaving company, taxable event upon exercise, or no effective tax event.
Companies focused on social impact goals and/or in developing markets may have unique ESOP considerations
1. Financial Inclusion Goals: Employee-friendly hiring practices and ESOPs can help build local financial inclusion. If this is part of your corporate mandate, consider the added social impact value of offering your options program to all levels of employees.
2. Local Ownership Culture: Conversely, in certain regions stock options may have negligible value to employees, either because of risk aversion, lack of liquidity, or lack of understanding. If this is the case, it is not worth extensively offering options to employees who would rather be paid in cash. ESOP size is a board-level decision. Given the legal and administrative overheads, you won’t want to revisit it between rounds of funding. The size of your ESOP should aim to cover all your potential talent needs through to your next round - make sure your ESOP allocation is sufficient, but if you over- allocate, you risk diluting your stake, and your existing investors’ stake. ESOP size can be created using a bottom up or top down approach (typically a mixture of the two).Further information on ESOP size is available on the link below:
https://www.indexventures.com/rewardingtalent/handbook/esop-size
Traditionally, ESOPs are set to 10% at seed.
We help businesses identify whether and when an employee share ownership scheme may be beneficial. If so, we support businesses in designing a scheme that is fully aligned to their commercial objectives.