The main asset of an IT company is its employees, and experienced managers realize that they need real professionals to create a world-class product. However, in the early stages of development, startups often cannot afford to provide employees with high salaries, a system of bonuses, provided meals in the office or other privileges. However, such companies have other ways to motivate employees on a long-term basis, for example, through the provision of options. One of the ways to motivate employees is the ESOP (Employee Stock Ownership Plan). This is an option program that allows employees of the company to purchase shares of the company on preferential terms or even for free.
ESOP is an important tool for attracting talented employees, retaining qualified professionals, increasing staff motivation and commitment, and increasing the value of the company as a whole.
Why ESOP practice is needed for a number of HTP resident companies
This is important for companies that are residents of the Hi-Tech Park for several reasons:
- Attracting and retaining talented employees. ESOP can be one of the key factors that attracts specialists to a company and motivates them to stay at work. Retention of qualified employees is especially important in the high-tech industry, where competition for specialists is very high.
- Reduced staff turnover. By having an ESOP, the company creates an additional incentive for employees to stay in the company on a long-term basis. This reduces staff turnover and preserves valuable employee experience and knowledge.
- Increased motivation. Employees who take an interest in the company’s success become more active, motivated, and purposeful. They are more likely to take the initiative, participate in the development of the company and achieve common goals.
- Increasing the value of the company. With the successful development and growth of the company, shares held by employees will increase their value, which will also become additional motivation for employees and allow them to benefit from the growth of the company’s value.
When is ESOP practice most useful
1. When an employee is motivated by referring to the classic stories of the development of IT companies
Best practices for IT companies have been established in Silicon Valley, where leading IT giants such as Google, Facebook and Apple have established a tradition of profit-sharing with employees who have contributed significantly to the success of the company since its inception. Over time, the shares provided to employees grow in value, while wages remain unchanged or increase slightly.
2. When an investor requires an ESOP
For many investors, it is important to have an ESOP in the company, as this adds confidence to the investor. In addition, it may require the implementation of ESOP in the future.
3. When looking for new employees
In a situation where a startup has a limited budget, instead of cash payments, the company offers its team the opportunity to purchase shares, which over time can become a valuable asset. This approach allows startup founders to attract qualified specialists without having sufficient financial resources at the moment. For many professionals, this opportunity can be significant and give a startup a competitive advantage over other companies.
4. When retaining employees in the company
Options contribute to employee retention. After you have attracted the best specialists, it is important to keep them as long as possible. Options usually provide the opportunity to receive shares only after a certain period of time (usually 4 years). This helps to keep an employee in the company, at least for the duration of the vesting. Vesting is a time period during which an employee receives all his shares provided for by the option program. He usually does not receive them immediately after hiring, but during the vesting period in parts. Additionally, if an employee retires early, he may lose his right to shares – companies often establish such conditions within the framework of the ESOP.
5. When self-motivating an employee
Options stimulate personal motivation of employees. A startup’s growth and prosperity always associate with them. The faster and stronger the company grows, the more likely an employee is to make a profit. Therefore, an employee participating in the options program will be more motivated to invest in the development of the company, realizing that he can be rewarded for its success, unlike an employee who receives only a fixed salary.
How employees can relate to options
The practice of employee option programs is a new phenomenon in Belarus. In this regard, employees may have a number of questions and negative reactions to the company’s proposal to include an employee in the option program. However, we have a number of recommendations for working out the objections of employees and explaining to them the usefulness of such a practice. Employees’ understanding of the company’s option program reduces or even eliminates negativity and rejection.
- Explanation of good practices for employees based on classic examples of the development of well-known IT companies. When a company enters the first public sale of shares on the stock exchange (IPO), an employee who is included in the option program has the opportunity to earn well in addition to wages and bonuses by selling their shares profitably. The employee has the opportunity to get a positive experience of selling his share in the company (exit).
- The employee’s understanding of the period during which the employee will become the owner of shares: the vesting period and the procedure for transferring shares to him during this period. An employee can receive a certain percentage of shares after a certain period of time after starting work, and further, until the end of the vesting and receipt of all shares due to him. The employee needs to clarify whether he will remain the owner of the shares in case of dismissal before and after vesting.
- Explaining to the employee what percentage of the company’s shares he owns, and what potential profit his share may receive if this share is sold under different market conditions.
The implementation of an optional program in the company is a responsible process. Experienced lawyers and accountants will organize it by preparing the necessary calculations and a package of documents, conducting consultations, and providing explanations on all emerging issues.
How to contact us
For more information or advice on ESOP issues, do not hesitate to contact us. We are here to help and support you.
Phone and e-mail communication options are available for your convenience:
- +375293664477 (WhatsApp/Telegram/Viber);
- info@spex.by.
