"Rewarding Talent: getting stock options right!” presented by Index Ventures
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The document provides sixteen key tips for designing a stock option plan aimed at attracting, retaining, and motivating talent in startups. Key recommendations include making all employees owners through stock options, tailoring grant sizes according to performance, and ensuring consistent communication about the stock options to avoid confusion. It underscores the importance of employee ownership culture and aligning financial incentives to create a motivated workforce.
"Rewarding Talent: getting stock options right!” presented by Index Ventures
- 1. Rewarding Talent Sixteen tips for designing your stock option plan Dominic Jacquesson Director of Talent at Index Ventures
- 2. Talent is your key bottleneck Building a world-class company requires a world-class team 1 Attract 2 Retain 3 Motivate 4 Align
- 3. Your secret weapons... Two things that startups can uniquely offer 1 Culture & Mission 2 Financial Upside
- 4. ESOP size in Europe is half that in the US 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Inception Seed Series A Series B Series C Series D Average founder ownership in cap table Average investor ownership in cap table Average employee ownership in cap table (ESOP combined) Evolution of ownership in US startups across funding rounds (where Founding CEO remains in place) European average 10% from Series A-D
- 5. Why? 1 Mindset 2 Government policy 3 Risk appetite 4 Lack of benchmarks
- 6. 1 Right-size your ESOP 20% 15% 10% 5% 0% Seed Series A Series B Series C Current Europe Index baseline suggestion Index deep tech suggestion
- 7. 2 Make everyone an owner • Give everyone some stock options • At least through to 150 employees • Create team alignment All-employee ownership levels in Series A/B startups 80% 70% 60% 50% 40% 30% 20% 10% 0% Bay Area Rest of US UK Rest of Europe
- 8. 3 Upfront versus delayed grants • Executives and engineers get their full grant upfront • Other hires - 5% of salary as upfront grant, assess 6-12 month performance before granting more “Giving a big upfront grant makes it hard to optimise for someone’s actual contribution. You don’t really know how good someone is when you hire them – but you know a lot more about them a year or two in.” Clint Smith Experienced US Corporate Development Executive and Startup Board Member
- 9. 4 Grant size - Executives * Pre-dilution Level C-level VP level Ownership range 0.8% - 1.5% 0.4% - 0.7% Number Maximum of three true C-level execs as you scale Could build a team of five to eight VP-level execs Upside if $1bn exit $10m* $4-7m*
- 10. 5 Grant size - Rest of your team Size of initial option grants expressed as a % of salary baseline 33% 15% 5% 50% 20% 10% 75% 33% 33% Engineering, Product,Business Development Marketing, Finance,HR Sales, Customer Success Individual Senior Director
- 11. 6 Grants - The full picture post-Series A Typical hiring plan and grants between Series A and Series B Function Level No. of hires Grant % of salary Grant $ indicative Executives C-level 1 $250,000 VP-level 3 $100,000 Engineering, Product, BizDev Director 2 75% $97,500 Senior 10 50% $40,000 Individual 15 33% $20,000 Marketing, Finance, HR Director 2 33% $36,000 Senior 4 20% $13,000 Individual 5 15% $6,000 Sales, Customer success Director 1 33% $26,000 Senior 2 10% $5,000 Individual 5 5% $1,500 TOTAL 50 $1,600,000
- 12. Superstars 15% 2x Critical Contributors 20% 1–1.5x Heartaches 5% 0x Rising Stars 15% 1–1.5x Reliable Contributors 20% 0–0.5x Steady Eddy 5% 0x Tomorrow’s Stars 15% 0–0.5x Steady Eddy Junior 5% 0–0.33x Mis-hires 0% – Contribution today Potentialforfuture High High Low Low 7 Modulate grant size by performance The Index Ventures Performance Evaluation Grid Evaluate 6-12 months after hire 1 2 3 Legend to grid 1 Tagline 2 Typical percentage of startup team in this box 3 Multiple of ‘base’ grant
- 13. 8 Offer cash < > equity trade off • Risk appetite varies by individual • Up to 15% of salary • Ratio 1:1 for simplicity • Be clear of impact on future salary increases
- 14. 9 Be consistent • Don’t rely on people not comparing notes • Clear formulae and guidelines • Avoid exceptions
- 15. 10 Go for the lowest strike price • Maximise employee upside • Fair market valuation where available – UK, US • What’s possible varies by country – UK, US • But don’t hit your company with a tax bill “Issue options at the lowest strike price you can. Maximise the financial benefit to the employee, and therefore the motivational benefit you can get from a given number of options granted.” Neil Rimer Partner, Index Ventures
- 16. 11 Be generous to leavers • Few early employees stay through to IPO • Reward them for their contribution • Leavers exercising options is a great outcome • Creates ambassadors for your talent brand • Best approach varies by country • US ninety days to exercise, else lose • Extended exercise periods • Retain-but-cannot-exercise until exit “Leavers have earned their right to exercise and become shareholders. You also don’t want them talking badly about you after they leave – this could damage your talent brand.” Martin Mignot Partner, Index Ventures
- 17. 12 Minimise accelerated vesting • All-employee acceleration at ¹⁄³ of European startups • Unheard of in the US • Deterrent to potential acquirers • Recommend double-trigger acceleration for entire executive team “All-employee acceleration is bad practice because you are sending the message that an acquisition is the end of the road. Buyers would definitely disagree with that.” Dominique Vidal Partner, Index Ventures
- 18. 13 Refresher grants are critical for scaling • Retain your key people as you scale • Offer at 2½ years into a 4 year vesting cycle • Introduce a standard program post-Series B • Target high performers – use the grid from earlier • Maybe just top 20%, or up to 50% of your team • Grant size as if you were newly hiring the individual “We didn’t do refreshers very well – we hadn’t expected we’d need to. It never became systematic, always ad hoc, which was a mistake. We lost good people, and others lost motivation.” Peter Campbell CFO, Mimecast
- 19. 14 Celebrate employee secondary sales • Long journey to exit • Highly motivational • Builds your talent brand • Only if excess demand when you fundraise • From Series B onwards • Discount of 15% is typical • Any fully vested employees – not just execs • Limit to 25% of vested options and e.g. $100k upside “At our last fundraise, and with the encouragement of Index, we allowed employees to exercise and sell up to 25% of their vested options, which really boosted team motivation.” David Okuniev Co-Founder & co-CEO, Typeform
- 20. 15 Celebrate your option scheme – but don’t hype it • Executive hires – 1:1 sessions • Promotions and top performers – 1:1 sessions • Group sessions for other employees • Assume employees know nothing about stock options • Make it clear that there is no upfront cost or risk • Outline different scenarios to illustrate potential upside • Offer letter with further details
- 21. 16 Further Index resources Rewarding Talent A guide to stock options for European entrepreneurs Both resources available at indexventures.com/rewardingtalent OptionPlan Design your stock option plan covering every team member
- 23. Q&A Dominic Jacquesson Director of Talent at Index Ventures