ESOP 101: Incentive Plans

An Employee Stock Ownership Plan, or ‘ESOP’, is a form of Incentive Plan.

Incentive Plans aim to attract, encourage, reward, and keep talent using equity and/or cash. These are an addition to the fixed wages related to an employee's contract.

When a startup is developing and burning cash, an Incentive Plan can help cut costs and extend the runway. How? By pledging a stake in the company's future value, employees may be more willing to accept a job at below-market rates. This saves the startup money in the early days, giving more time for development, often raising the chance of success.

A phase later, it’s usually hard work, and an Incentive Plan can help keep employees motivated. This is because they see their hard work tied to the future success of the startup.

Later, the company may have become a market benchmark. It no longer needs to rely on adventure, but can now offer market rates. This is more traditional but also more conventional. An enticing Incentive Plan can help it stand out from other 'grown-up' businesses. It can make the opening offer more intriguing.