Why employee share option plan (ESOP) matters to a first-time founder
Early hires often accept below-market salaries, and options are how you make up the difference without spending cash. Skip a proper plan and promises made in emails or offer letters can turn into disputes about how many shares, at what price and on what terms. Investors also check the plan and the size of the pool during due diligence, and a messy one can delay a funding round.
Examples of employee share option plan (ESOP)
A startup with 9,000,000 shares sets aside a pool of 1,000,000, which is 10% of the 10,000,000 fully diluted total. It grants its first engineer options over 100,000 shares at an exercise price of £0.10, vesting over four years with a one-year cliff, so 25,000 vest after the first year. If the company later sells for £5 a share, the fully vested options are worth £490,000 before tax.
Common misunderstanding
An employee share option plan is not the US employee stock ownership plan, a regulated retirement scheme that holds shares for staff in a trust; that meaning has its own page, and US investors may read ESOP that way. Founders also confuse options with shares. An option holder owns nothing until they pay the exercise price, gets no vote or dividend before then, and usually loses unvested options on leaving.
When to use it
Set up a plan before you promise equity to your first hire or adviser, or in the run-up to a seed round, when investors will expect a pool on the cap table. Tax treatment varies by country, for example the UK’s EMI scheme for qualifying companies, so check the rules where your staff are based. Leave it for now if you have nobody to reward with equity yet.