Incentive program for employees
Tech startups by definition have little cash but huge growth potential. So rather than paying high cash salaries they typically offer their employees (and sometimes also board members and advisors) the possibility to participate in their future success.
The following three options are used most frequently:
- Share option programs (ESOP)
- Share programs
- Virtual programs / phantom shares
All options have pro’s and con’s, and you will need to discuss the best option for your specific situation and jurisdiction with your lawyer.
How big should an incentive program be?
Independently of the solution you are choosing, you will want to provide 10-20% of your future upside to employees. Here are some further guidelines to choose the size of this pool:
- Rather 10% if the founders (who already own a substantial part of the company) cover the needed competencies, and/or if you tend to push towards a trade sale over the short to medium term;
- Rather 20% if you need to attract various key people, and/or if your objective is to go for an IPO.
Beware that investors like to see that the incentive program is already created BEFORE the round (= dilution is borne by the existing shareholders). However, as a CEO you can argue that this should be part of the round, and be created at the same time. Depending on your jurisdiction and whether you already have an incentive program or not you will need to discuss with the lawyer how to implement this in your term sheet.
Who should be part of the incentive program?
Some companies make an incentive program available for executive members at their headquarters only. Others offer it for all employees around the world, and even include advisors.
Our opinion is to open the program up for ALL employees. This creates a strong team – and you could argue that having motivated junior programmers or customer success agents is as important as a motivated CFO.
Having said this, don’t underestimate the admin work if you go for such a solution. And make sure the program works in different countries. If you want to incentivize people around the world you will propably go for an ESOP, which is standard in the US and many other countries. Some tweaking may be needed to make the program work internationally: E.g., the strike price of US employees will be based on a 409a valuation, in other jurisdictions you can go for nominal value. But experienced lawyers know how to set this up.
We plan to write an in-depth blog post about this topic. Please follow us on LinkedIn (see icon below) in case this is of interest.