Startup employee stock option plans: Overview and best practices

Employee Stock Option Plans (ESOPs) motivate startup employees by aligning their incentives with the growth of the business.

Employees of Lidya, a fintech startup and Accion Venture Lab portfolio company

This guide covers options plans, how much equity to offer, creating terms, and long-term strategies. It includes a model example and resource appendix.

Part I: Intro to Options Plans

  • What is an ESOP?
  • What is an Option?
  • Lifecycle of a Startup ESOP
  • Common Terms in an Options Package
  • Why Issue Options to Employees?
    • A Defining Characteristic of Startup Culture
    • A Necessary Part of the Capital Structure
  • When to Create an ESOP?
  • Communicating Options to Employees: % versus $

Part II: How Much to Grant

  • Two Approaches
  • The Top-Down Process
    1. How Much Equity to Set Aside in the ESOP?
    2. A Typical Distribution Schedule
  • The Bottom-Up Process
    1. Segment Your Human Resources
    2. Establish Pay Multipliers for Each Role
    3. Determine the Dollar Value of the Options Grant
    4. Determine the Current Share Price
    5. Calculate the Options Grant
    6. An Example: Hiring a CTO
  • Important Takeaways

Part III: The Fine Print – Terms

  • Strike Price
  • Vesting Schedule
  • The Cliff
    • Example: Standard Vesting w/ a Cliff
  • Vesting in a Liquidity Event
  • Exercising Options
  • Tax Considerations
  • Legal Advice

Part IV: ESOPs for the Long Term

  • Retention Grants
  • Discretionary Grants
  • Social Impact Considerations
  • Options Modeling – Overview
  • Options Modeling – A Detailed Example

Part V: Resources & Further Reading

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