Check out a few reasons why startups should create their ESOPs sooner-than-later below 👇
Data shows that ESOPs are helpful in encouraging employees to stay with a startup, as they have a stake in its success. For those who are focused on retention, startups can consider a 'heavy-tail schedule' where employee vesting is loaded towards the end of the vesting period.
Takeaway: Not only is employee retention important for company culture and camaraderie, staff experience and knowledge only improves with longevity!
Attracting Top Talent
Offering an opportunity to have a stake in the business makes a startup more attractive to potential employees. Plus, top talent is used to having an opportunity to participate in a share/options plan. Data shows that 30% of surveyed startups in the Netherlands offer shares or options to everyone at the company, with 75% of startups offering ESOPs or SARs to at least leadership teams [RocketX, 2021].
Takeaway: ESOPs have become a standard yet crucial benefit of working for a startup. Having one early will set a company up for attracting top talent.
🍿 Check out more on how ESOP impact talent recruitment in our webinar with WE.VESTR & RocketX.
There are often tax benefits for startups that establish an ESOP, such as deductions for contributions made to the plan. Startups that create their plans early can take the time needed to consult an expert to design their plan to best facilitate tax advantages.
Takeaway: ESOPs are tricky, and so are company taxes! Starting early can help startups take full advantage of the tax benefits.
🍿 Check out some of those tax advantages in our workshop with WE.VESTR & Archipel Tax Advice.
Increased Company Value
An ESOP directly increases the value of a startup by adding shareholders and equity to the company cap table. Not only is there a direct increase in value, there is also an opportunity for an increase cultural value by aligning employee and shareholder interests.
Takeaway: Starting an ESOP early boosts not only literal value of the company, but also sets the scene for long term alignment between all company stakeholders (founders, leadership, employees, and investors).
Attractiveness to Investors
More and more, we're seeing investors mandate that startups have an active employee participation plan by Series A rounds (or even earlier). Not only do investors want to see that the founders understand the long term impacts of employee participation plans, but starting earlier limits dilution of adding ESOP an ESOP later in the game.
Takeaway: Investors know the value of ESOPs for startups, and consider it a sign of a well-rounded and prepared leadership team if they see early-stage startups already on top of their participation plans.