Union Square Ventures’ founder Fred Wilson has been quoted as saying that equity “reinforces that everyone is on the team, everyone is sharing in the gains, and everyone is a shareholder.”
6 reasons to adopt an employee share option plan (a.k.a. ESOP):
1. Attracting Top Talent: Offering an ESOP is a competitive advantage in attracting and recruiting top talent, particularly for smaller companies seeking to entice talent away from larger companies with competitive salaries. Instead of large salaries and perks, job seekers may be enticed by the prospect of having a stake in the company's success and sharing in its potential financial gains.
2. Retention of Key Employees: ESOPs are particularly effective in retaining key employees who play critical roles in the company's success. By granting them ownership in the company, you create a strong incentive for them to remain dedicated and committed to the business.
3. Employee Motivation: ESOPs serve as powerful motivational tools, inspiring employees to go above and beyond to contribute to the company's success, ensuring they benefit from the company’s goals. Their interests become aligned with those of the company and its shareholders.
4. Tax Benefits and Cost-Effectiveness: Certain forms of ESOPs can offer tax benefits for both the company and employees. Additionally, compared to other forms of cash incentives or bonuses, ESOPs can be a cost-effective way to reward and motivate employees.
5. Boosting Company Culture: Implementing an ESOP can foster a positive company culture where employees feel valued and appreciated. It promotes a sense of unity and teamwork, as everyone works together towards shared goals and the company's long-term success.
6. Retain Control: It’s important for those setting the company’s strategy – the founders and key shareholders – to retain control of the company. Employees typically receive non-voting shares.
TL;DR: An employee share option plan is used to attract, incentivise and retain top talent while aligning their interests with the company's growth, fostering a dedicated and motivated workforce.