The Best Ways to Implement an Employee Stock Option Plan (ESPO) – with Jason Atkins
Every founder would love to build their own ‘dream team,’ but that is usually easier said than done. Fortunately, tools like the Employee Stock Option Plan (ESOP) help achieve that goal. But then, how exactly do you implement ESOP in your SaaS company?
Cake Equity Co-Founder and CRO Jason Atkins reveals the magic of ESOP with B2B SaaS Sales Coach and Host Matt Wolach in this week’s episode of SaaS-Story in the Making. He eagerly dissects the key concepts of equity in a founder-friendly manner. Watch and witness your company grow faster through a more motivated labor force!
Podcast: SaaS-Story in the Making
Episode: Episode No. 235, “The Best Ways to Implement an Employee Stock Option Plan (ESOP) – with Jason Atkins”
Host: Matt Wolach, a B2B SaaS sales coach, Entrepreneur, and Investor
Guest: Jason Atkins, Co-Founder & CRO at Cake Equity
TOP TIPS FROM THIS EPISODE
Be Aware of the Amount of Paperwork
Equities can be quite complex, and it takes a lot of work to fashion the correct scheme. Atkins said that many founders need to learn how much effort is required in order to launch an ESOP, so they fall short. They get bad outcomes, such as needing more time to get the offer letters signed or not being able to afford the total cost of the legal fees.
He further explains that this is even more critical as launching a poor scheme would mean throwing away millions of dollars for nothing. Writing the vesting rules correctly would equate to not achieving the desired result, which is getting the best employees. The bad outcome could be likened to not having a proper prenuptial agreement only for your employee to divorce you immediately.
Create an Ownership Culture
Getting your employees to think like an owner is critical to the ESOP’s success. After all, they are the business’s co-owners as long as they adhere to the vesting rules. If a team member treats your business as their own, they would naturally put more effort into it, leading to a win-win outcome.
You can begin implementing this culture by actually treating your employees as co-owners. Atkins advised that you treat your team like investors and give them reports about the company. Think of it as conducting shareholder meetings to ensure that everyone is aligned. You should also ensure that the cultivated culture matches the designed equity scheme.
Make Room for Questions
Even if you provide all the documents regarding the ESOP and create an FAQ, it is vital that you still offer chances for your team members to ask questions. Only some people will be financial gurus or be on the same page. Atkins explains that employees ask a surprising number of questions they cannot capture in an FAQ.
Some of the questions are important such as how an employee might ask, “Have I got the same as everybody?” This implies that they are still determining if the scheme is fair, and this sliver of doubt can be pretty deadly to ESOP. After all, if your workforce does not trust the system, it would reduce its efficiency in giving you the benefit that you intended to obtain from it.
Educate Your Leaving Team Members
Only some people will stay on the team forever, which is entirely normal. Think about it; even the company itself may eventually be sold. This is why you have to account for resignation amongst ESOP holders when you create the scheme.
Atkins advises being cool with your team members who leave of their own free will. Make sure they are aware of their obligations so they maintain their equity. Atkins also recommends that for those who didn’t leave voluntarily, founders should “create a more generous outcome… just to sort of soften what is otherwise a pretty tough situation.”
Get Into Scalable Systems and Use Accelerators
Atkins advised that it’s natural to focus on tasks that build first, but software founders should prioritize getting into a position where they can scale. The financial growth from scaling will ensure that the company remains solvent and help find the product-market fit faster.
He also explains that it would be a great idea to use accelerators to boost the scale rate further. Accelerators are experts that speed up your progress because they’ll be handing you shortcuts and navigating you through roadblocks. In this case, Cake Equity would be an excellent accelerator for implementing your ESOP while Matt will be accelerating your scaling business itself.
ESOP Attracts the Best Talent
They say in business that if you want to get the best value, you have to be prepared to offer the same in return. It only makes sense that you have to provide a piece of the company to get the best workforce. Of course, it has to be earned, and that’s why schemes are essential. But getting this done right would put your company on the best footing possible.
ESOP is a Good Retention Tool
Just as ESOP is excellent at acquiring employees, it’s also absolutely fantastic at keeping them. And this is critical for early-stage founders who want to hold on to their IP. Getting tenured employees will be a piece of cake if you create a scheme that rewards fairly. Just make sure that the worth of the ESOP is properly explained, including how much more it may be in the future.
The 409A Valuation Determines Stock Price
For those of you wondering how to calculate how much your ESOP will be, you don’t need to do it by yourself. Just hand it over to a financial company like Cake Equity, and they will take care of this for you. Remember that you must do this regularly at every major event to ensure that your fair market value (FMV) remains accurate.
[3:52] “We love how, you know, innovators are changing the world for the better. You know, not all innovation is useful necessarily, but I think through that innovation process, you know, so many of, you know, the big problems are being tackled.”
[4:40] “And I was shocked at the complexity level, and I thought how a regular founder will tackle all this without a finance background. Like it’s literally nearly impossible… I just thought, ‘Wow,’ you know, like, we should be able to one click the hell out of this.”
[13:17] “Now I don’t think it’s fair to sell the dream… But I think you do want to sell the dream a bit because, you know, great people wanna be in this type of company. They wanna be lifting heavy and they wanna be benefiting. And then you can have this team of heavy lifters if you get that culture right”
[6:43] “People enjoy their team. And their team is something that’s really powerful, something that actually helps the company grow and scale. And with a lot of these teams, a lot of founders I speak with are starting to think, ‘Hey, we need to make sure we take care of our team. We want to keep them around’ So people wanna give them some stock, give them a piece of the company.”
To learn more about Jason Atkins and Cake Equity, visit https://cakeequity.com/.
You can also find Jason Atkins on LinkedIn at: https://www.linkedin.com/in/jasona-cake/.
For more about how host Matt Wolach helps software companies achieve maximum growth, visit https://mattwolach.com/