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The Ins and Outs of Startup Equity
For startups, attracting and retaining top talent is a top priority. This is where Employee Stock Option Plans (ESOPs) shine, offering startups the ability to trade equity for cash compensation, compete with larger companies, and align employee goals with company growth.
Types and features of different equity compensation instruments (based on our own research)
But there’s a catch: ESOPs are often misunderstood. Employees oftentimes struggle to grasp what their equity means—whether it’s expressed in dollar amounts, percentages, or shares—and may undervalue or even forfeit options due to unclear communication or liquidity challenges.
Meanwhile, founders must navigate tax implications, compliance, and the need to design plans that retain talent while keeping equity meaningful. We covered some research about how to size ESOPs here and here before, but felt that many resources only address bits and pieces, not the grand picture.
Taxation can be a tricky topic for stock options and differs from country to country. Illustration by Index Ventures (2024)
In today’s episode, we aim to provide a comprehensive guide on ESOPs: why they matter, where they fall short, what benchmarks look like, and how founders can turn them into a powerful tool for growth and engagement - if done right.
This article is based on the latest research and includes a variety of resources. Hopefully they serve you or your portfolio companies as reliable guidance.
Let’s dive in!
