4 ways ESOP helps founders build and retain a high-performing team
- ESOP is a great way for startups to attract talent by offering competitive compensation packages.
- ESOP gives your team a good reason to stay for longer, improving talent retention rate.
- ESOP can increase productivity and innovation in your company by incentivising good performance.
- ESOP can facilitate a positive work environment based on trust.
Growing your startup
The most important factor that affects startup growth is the quality of the founding team and early employees. A recent study by the US National Bureau of Economic Research found that startups that succeed in recruiting and retaining talented employees have higher customer satisfaction, product sales and better brand reputation. On the other hand, losing early employees can severely impact the size, productivity, and survival of the company.
Let’s look at four ways ESOP can help startup founders grow their business by creating the perfect work environment.
If you’re not familiar with ESOP or need a quick refresher, check out our simple guide here! A 5-minute guide to ESOP and why they matter.
1. Recruit a great team
If you want to build a great company, you need to recruit a great team. Getting the right team is crucial for startups, yet it remains the biggest challenge that founders face. A large company can offer high salaries while a startup would struggle especially with limited cash flow. ESOP can offer a solution to this problem.
ESOP can supplement salaries in order to achieve parity in compensation.
The upcoming public listings of the high profile Southeast Asian unicorns like Grab show that the financial returns from startups can be equivalent or even greater than that from more established companies. This means that ESOP can be extremely attractive to talents if your business has potential to grow.
In addition, when ESOP management is transparent, employees are able to track the growth in the value of their shares as the company grows. With ESOP, you don’t have to choose between using your limited resources to reward employees for their contributions or investing in future growth. You get to reward your team for their efforts while growing the company at the same time!
2. Give your team a good reason to stay
Assembling the perfect team is only the first step to growing your startup. The real challenge comes in talent retention and keeping your team invested in your company.
According to a survey by Founderscircle, hyper-growth startups may see up to a 25% attrition rate, with a quarter of employees leaving each year. This is double the industry attrition rate, showing that startups may face a challenge keeping their employees engaged.
Vesting gives your employees a reason to stay and contribute to company efforts for longer. A typical ESOP will have a vesting period of 4 years with a 1-year cliff. This means it will take a year before employees start to earn their stock options, accumulating them until all the stock options vest in the fourth year.
This structure provides a strong incentive for your employees to stay as they will forfeit any unvested shares should they choose to leave before the vesting period is up. In this way, ESOP can help you reduce employee turnover rate and retain talent.
3. Keep your team motivated
In many firms, the people who own the company don't work for the company. Meanwhile, employees don't own a stake in their work beyond a monthly salary.
ESOP lets you change that. Employee ownership means your team at work are also the shareholders of your business. Having “skin in the game” means having much more to gain (or lose) based on their work performance.
When the company grows, your employees get to reap considerable financial returns on their shares, creating a truly win-win scenario for success. This aligns the interest of your employees with your business directly, empowering them to think and act for the company in the same way that you do.
A Rutgers study suggests that firms with employee ownership see considerable increases in productivity and innovation because of the sense of ownership bestowed on workers. When employees take ownership of their work, they work harder and smarter.
When your employees are shareholders of your business, worker co-monitoring helps keep everyone focused. The study found that adopting ESOP creates an anti-shirking culture at work, reducing free-rider behaviour, and encouraging cooperation between employees.
This reduces the need for managerial oversight and micro-managing, practices that can be very costly at startups with small teams.
4. Create a work environment based on trust and cooperation
The best performing teams flourish in an environment of trust and cooperation. When your team has a shared purpose to help the company thrive, it is easy to foster a culture based on teamwork and mutual success.
ESOP can help you create such a workplace. The same Rutgers study found that firms with ESOP reported higher levels of worker satisfaction and trust in the workplace. When everyone feels like they are recognised as equals, collaboration in the office goes up. Employees are more willing to work collaboratively and encourage one another as mutual owners.
That sense of ownership and mutual trust can go a long way in building a positive work environment where employees feel safe enough to take risks and be creative. This will help your business innovate and stay nimble, qualities crucial to the early stages of any company.
For startups, investing in your team can be the best way to grow your business over the long term. ESOP allows you to attract the best talents and help you improve talent retention by achieving the 3 Rs of employee retention strategy: Recognition, Respect, and Reward.
Every employee is first and foremost, a person. Respecting your employees means treating them as an equal. When you grant an employee ownership of a part of your company, you create an equal relationship by showing that you respect them as a fellow shareholder.
Recognising the effort and performance of each employee is key to motivating them. Showing appreciation by granting additional stock options to outstanding performers is a great way to incentivise your team to go above and beyond in their work. ESOP gives you an easy way to do this.
Ultimately, every person works to be rewarded, either on a personal or financial level. ESOP allows you to reward employees and stay competitive in your remuneration.
Setting up an ESOP can sometimes be complicated and time-consuming, but the benefits are well worth it.
We want to make ESOP easy for you! If you would like to know more about setting up an ESOP, do contact us. Reach out to us at email@example.com.