Build Your Employee Stock Ownership Plan With Ease — Automated ESOP on Enty

Kirill Zheleznov, Enty CEO
Dec 15, 2020 · 6 min read

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Why would an employee choose to leave the comfort of working for a proven business that gives you all benefits that you can imagine to start working in an early-stage company?
We can't give you the exact answer. But there is one thing that might have a crucial influence on the decision to switch things around — Employee Stock Ownership Plan (ESOP).

What Is ESOP and Why It Is So Important

ESOP is an employee benefit plan that gives workers ownership interest in the company. Companies often use ESOPs as a corporate-finance strategy to align the interests of their employees with those of their shareholders.

Employee ownership is a proven model to build healthy companies and workers who are highly satisfied with their jobs. Employees can see a direct link between the work they do every day and the overall health of their company, it provides a powerful incentive for them to do well so the company does well, which then rewards the employee-owner.

Outside of that, ESOP can provide an employee with significant retirement assets if one is employed by the company for a significant period of time and the employer stock has appreciated over the years to retirement. From another point of view, ESOP is how founders attract the employees who are going to help build the company.

There are several types of employee ownership:

  • Direct-purchase programs
    Employees purchase shares of their respective companies with their personal after-tax money. Some countries provide special tax-qualified plans that let employees purchase company stock at discounted prices.
  • Stock options
  • Provide employees with the opportunity to buy shares at a fixed price for a set period while phantom stock
  • Restricted stocks
    Restricted stock gives the employees the right to receive shares as a gift or a purchased item after meeting particular restrictions, such as working for a specific period or hitting specific performance targets.
  • Phantom stocks
    Provide cash bonuses for good employee performance. These bonuses equate to the value of a particular number of shares.
  • Stock appreciation rights
    Give employees the right to raise the value of an assigned number of shares. Companies usually pay these shares in cash.
However, ESOPs have complex operating rules and require significant oversight. If the company does not staff the ESOP properly, they risk problems and potential violations. Small companies and those with unsophisticated accounting processes are particularly ill-suited to ESOPs because they lack the infrastructure to follow the protocols and provide the required support and information to employees.

With this in mind, we've tried to make the ESOP creation as easy as possible for all parties involved.

Option ≠ Share

Stock/Share — a fractional ownership of a company;

Option — the option to purchase stock. Employees don't actually own shares until the options convert into shares

It's also important to understand that while issuing an option you don't give out the fraction of your business right away, while options represent the right to purchase stock, at a specified price (exercise price), for a specified period of time, or when the options expire. Options are exercised if the value of the shares is higher than the option price.

    Average ESOP Size

    On average, startups allocate from 10% to 20% to the participation plans
    One of the main factors that influence the size of the poll is the composition of the founding team. If a team needs to key hire or a non-founding CTO, more shares will be allocated to the ESOP.

    The option pool is usually replenished with fresh options that are used to attract additional team members and top up the shares held by key members of the team. Management should develop a forecast of option grants based on their hiring plan to ensure the company has sufficient options available for recruiting and retention purposes.

    ESOP Distribution

    The place of a CEO in the option pool is highly debatable, as the founding CEO already owns a portion of the company. When it comes to a non-founding CEO, the distributed amount is around 33% of the option pool (3–5% of the company).
    The executive (C-Level) team takes up to 33% (3–5% of the company). With an average grant of 6.6% of the option pool (up to 1% of the company).

    Other employees take up to 33% of the option pool, with each having from 2% to 4% of the option pool (0.3% — 0.7% of the company).

    Our Approach

    We aim towards maximum automatization, reduction of excessive paperwork, reduction of costs, and easy management from your account.

    We provide tools that will allow the company to create ESOP from scratch with ease and in short timeframes. Everything is done online and there is no need to attract several intermediaries in order to prepare your plan.

    First, the company decides on all details, requirements, and terms of your ESOP. Everything is structured personally, however, all needed templates for the ESOP plan are available for all users at any time.

    Those are the basic tools available for companies. As a result, with Enty you have the dashboard where you can manage your stock options plan, all terms and conditions of your program can be done for you. And most importantly, our dashboard allows you to plan how your options plan will influence the capitalization table of your company. But there is more to it, if you want to reach maximum automatization, we have several more advanced features as well.

    After terms and conditions are decided and set up is completed, we help you issue options in a modern way. These options can be later converted to securities — everything is done on our platform without having to go anywhere else or being tied by a number of intermediaries. Along with that, the company can easily track the whole lifecycle of all stock options using the dashboard in your profile.

    From the employee's point of view, everything is done easily as well. First, we will send the registration/activation link to employees. Then, stock options will be sent to their account by the issuer. Stock options management and the opportunity to redeem payments or securities are also available in the personal account as well.

    The feature is currently being developed, we expect it to be launched in the next couple of months together with other back-office management features.

    Stay tuned to our updates and don't miss our new features. In the meantime, if you are thinking about incorporating your own company in Europe, start now, and we will make the process seamless for you :)
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