Top
THE
CASHEROES
Epsiode
3
40
mins

Demystifying ESOPs for early-stage startups

Intro

Vaidhyanathan, a CA by nature, has built & scaled the finance function at Freshworks during its growth phase. We want to highlight the learning he brings along with him, having managed the Cap Table and Employee grants for Freshworks Group. Currently he is a Finance Controller at Airbase.

Key Takeaways

  • Invest capitalisation table management and valuation software as early as possible.
  • When your 409A valuation becomes 30-40% of your share price, start actively considering RSUs.
  • Advice for Founders: Decide early about your ESOP pool and have a plan for hiring.
  • Advice for Finance Execs: Stay updated on changes in tax laws of related geographies.

How it works in early-stage?

At early stage, you may have less employees and more consultants. You might have to give stock options for consultants.

You can give ESOPs with 1/2/4 year vesting for consultants.

In case of such consultants joining the company at a later stage, continuing the same stock option plan will have complexities.

How it differs for Co-Founders, Snr & Jnr employees

Co-Founders get different type of shares compared to ESOP plan. They need to buy that initially.

Except Co-Founders, ESOP plan is common for all other employees.

For Senior employees, you can have an additional vesting clause like target based. Same applies during reloads.

For regular employees, it's advisable to keep it less complicated. Because as you scale, it can complicate your expense reports.

Option Pool Recommendation

Its advisable to decide early about your ESOP pool and have a plan for hiring.

Commonly followed option pool is 8 to 15%. For Indian companies (founded in India, USA, Singapore), 10% is the median.

Y Combinator recommends 15%. This applies more to Valley companies.  

Finance Team's Role in Operationalising

Investing in the right tool (like Carta etc.) than handling it in excel makes operationalisation much easier.

Staying updated on changes in tax laws of related geographies.

Help employees understand tax implications at the time exercising as there might be huge jump because of change in tax brackets.  

A valuation cannot be more than one year old. 409A valuation needs to be refreshed every year.

Liquidation options other than IPO

Secondaries: Existing shares vested to employees being sold to investors.

Criteria for Employees who can avail for Secondaries must uniform. For example: First 100 employees or X year tenure employees.

Threshold of how much they can sell as secondaries also must be uniform for all employees who are eligible.

Rapid Fire with Vaidhyanathan B

When do you start and end your workday?
I start early in the morning and end my day by 10pm.

How much sleep do you get?
Not as much as I would like.

Podcast/Book suggestion for people joining fast-growing startups
Tom Tunguz

Apart from core finance skills, what is the additional skill that a Finance Member can learn which will help them during the early fast-growing startup phase?
Being open to challenges, extremely proactive, never taking pressure too hard, being comfortable to say “I don’t know“, always being open to taking up tasks.

Something that you would do differently or take a different call during your personal or professional life if given a magical wish?
“Would have wanted to have met my wife and travel more".