As a founder of an early-stage startup, you’ll have to compete with corporate salaries that you might not be able to match when you’re hiring your first team members. Share Incentive Plans (also known as SIPs or ESOP) can be one of the tools that help you compete by offering your team the potential of a monetary reward in the future if your startup is successful.
There are also two added bonuses with Share Incentive Plans. Firstly, they make your team feel more invested in the company and its growth by aligning them with the founders and giving them an owner’s mentality. Secondly, they help retain talent in your startup for the longer term because the share options granted under SIPs take time to vest. These benefits can more than make up for the fact that you can’t offer them typical corporate benefits.
1. How do Share Incentive Plans work and what do they do?
A Share Incentive Plan (also known as a SIP or an Employee Share Option Plan or ‘ESOP’), sets aside a pool of your company’s shares that you can allocate in the future to employees, directors, advisors and consultants, incentivising them to contribute to your startup’s success and growth.
The share options will be issued to team members as part of a vesting schedule, rather than all at once. Usually, this is a period of around four years with a one-year period, called a cliff period, where no options vest. After this, the share options will be issued as per your vesting schedule. This might be monthly, quarterly or yearly – it’s up to you.
Vesting protects you and your investors by allowing the business to hold on to your shares at the outset, with them being awarded over time rather than all at once. This ensures team members remain aligned and incentivised to stay with you and grow the business over the long term. Vesting can also help you manage unnecessary dilution by clawing back shares for team members who leave under certain circumstances (e.g., those that are deemed “bad leavers” because they did something wrong or breached an important obligation).
2. Grant Agreements and putting Share Incentive Plans in place
Share Incentive Plans are generally easy to implement and can be processed as part of your employee onboarding packet (alongside, for example, their employment/consulting/advisor agreement, an IP assignment agreement or non-compete agreement). To put your SIP in place, you will typically need to adopt it through a board resolution that will make the plan ‘go live’. After that, all you need to do is sign a grant agreement with each team member you want to give share options to.
The grant agreement will set out the number of share options being granted, the vesting schedule and the exercise price (what price they will pay when they choose to buy the shares). This way, those elements can be tailored differently to each team member, if you wish.
Grant agreements also offer additional protections like setting out buy back rights that allow your startup to buy back shares that may have been allocated to individuals when they leave the company, drag along rights so you can force a transfer of their shares to a buyer as part of an exit, putting restrictions on the shares (eg not being able to transfer them without board approval) and requiring participants to sign any other documents that may be required in the future (e.g. shareholders agreements).
Essentially, creating a SIP is a great way to ensure that your team members are incentivised to make your business a success, especially if you can’t offer them typical corporate discounts. Employees attracted to work for startups with SIPs in place are likely to be future thinking and success-oriented, meaning that you can have more confidence that they’ll perform their role well.
You can create Share Incentive Plans, create employer/consultant/advisor agreements, generate non-compete agreements and more on Clara.