Generate your ESOP with Clara

You’ll want to put in place an ESOP so that you can attract, incentivise and retain team members, and empower them as part owners aligned with the interests of your startup. Given that working for a startup is risky and the cash portion of the pay is often lower than traditional jobs, this can be a key tool in getting the right talent onboard.

Every situation is different. It generally makes sense to have one as soon as you feel you need to start attracting talent and hiring and growing your team.

This depends on how you choose to structure your ESOP and there are important tax implications both for your startup and for your team members, so please always obtain professional tax advice (and your team members should too). However, it is common for some payment to be made, either based on the fair market value of your startup at the time the grant of options was made – more typical for jurisdictions with tax – or at the very least the par value of the shares (a small nominal amount that is typically between US$0.001 to US$0.00001 depending on the jurisdiction) as this is usually a legal requirement – more typical for low or no tax jurisdictions.

While they hold only the options, their only rights will be the right to exercise the options as they vest and receive the corresponding shares. Once they become shareholders, the rights they have will depend on how you choose to structure your ESOP. It’s not uncommon to give very little rights, including no voting rights, as the main purpose of the ESOP is to provide economic incentives and not governance rights.

If you sell your startup while options remain outstanding subject to vesting, you have to look at your “acceleration” provisions. The most typical ones are “single-trigger acceleration” which immediately accelerates all vesting so that your team members take all their shares immediately prior to the sale and can sell them at the same time as the sale or “double-trigger acceleration” which means that a team member’s vesting schedule continues as is under the new buyer and would only accelerate if their engagement with the startup is terminated as part of the sale or within a period of time after (typically between 6 to 12 months).