Equity · Hiring

What are the best ways to explain options (ESOP) to employees?

Anonymous

February 11th, 2015

As an early stage startup giving equity, we've noticed that most startup employees (super experienced excluded) don't have a great understanding of the equity side of their offer.
They fail to see why equity in company that raised $100M already has a different upside. I'm not at all saying they can't understand, just that I don't think it's well understood. Wondering how other founders handle explaining this without sounding extremely self-serving or if there is an easy resource you point them to?

Michael Barnathan

February 11th, 2015

Being cynical, it's usually in founders' interests not to explain equity to their employees. It tends to work against the employee rather than for.

I do like to give a brief overview of the really important things - "here's what it's worth now, here's what it might be worth under a few different scenarios, go read about dilution and taxation". Basically, I model equity disclosures on the "truth in lending act" that applies to loan documentation.

Brian McConnell

February 11th, 2015

This is easy. Just tell them, there is a 90% probability that these options will be worthless. There is a 10% probability that they might be worth something, someday, eventually. There is approximately 0% probability that you will become independently wealthy because of them. That's the simplest explanation, and in the majority of cases, most accurate. I always advise colleagues to treat ESOPs as the equivalent of a pile of free lottery tickets.

Shobhit Verma

February 11th, 2015

I think Brian and Michael are pointing out that most people who work for startups except the founders and some highly experienced hires do not really get the inherent risks in startups. ESOPs are easy to teach but the full disclosure is really to make them understand the probabilities associated with them.
Anyways, I used the following presentation
http://www.slideshare.net/rodinhood/esops-for-startups-by-rodinhood