From the VC’s corner (18): embrace ESOP and be thankful

As a founder, you want to maximize the equity in your company, and when giving options to employees (and maybe to a few close advisors/mentor,) you know you can’t hand them out like candies. Let’s say you allocated for this a 10% stake, and the valuable employees (or maybe all?) have options with a 4-year vest and 1-year cliff, with a 25% vesting on day 366 followed by equal monthly tranches, each for an ownership ranging from 0.01% to 0.5%, and with the top management in the 0.51–0.99% range (or more.)

You are aware the cap table gets complicated, and when the next investors jump in and ask for a specific percentage to be allocated for the employees stock options pool (ESOP) — like keeping it at 10% post-money, you need to add a number of options to have a certain percentage of unallocated ESOP post the round, so be careful with the cap table’s Excel (or use some dedicated app.)

But what are the real effects of such a decision? Think loyalty, associated with retention, and productivity at market-level salaries (although in some parts of the world, employees with options might be working for below market wages.)

Your employees will keep the options only if they meet the retention criteria, so they will probably stay with the company as least one year from the option grant date for the first 25% of options granted to become theirs. Thereafter, they’ll earn the remaining 75% through the 4th year, with 1/48th on a monthly basis. Those leaving before the vesting period ends forfeit the unvested stock back to the option pool.

Employees’ tenure at the company matters. If the company sells or goes public, even having a 0.01% stake might be a lagniappe, and you, as a founder, should not think this can be expensive, but rather be thankful to the employees that helped you get there.

When you’re looking to raise capital, and your cap table is highly complex, with options, convertible notes on top of notes, and your company has also other issues that need to be cleaned up (WeWork-style), then there’s a saying, as Fred Wilson mentioned in a very recent blog post, “there is a lot of hair on that deal;” and investors will raise their eyebrows… ”The more eyebrows you raise with investors, the worse it gets. And hair can get in the way of an otherwise financeable opportunity,” Fred concludes.

My today’s preferred: Fix Posture launched on Product Hunt with a ~creative~ tactic to solve your slouch. T Olesya Chernyavskaya’s app (public on Glitch, https://glitch.com/~fix-posture) simply blurs your screen if you don’t maintain good form while you work. How? It checks your position using your webcam.