Why ESOPs must be doled out very carefully?

In the very initial days at any start-up, when the funds are in short supply and challenges are too many, the new entrepreneurs may generously dole out partnerships just like Ranbir Kapoor in the Bollywood film Rocket Singh – Salesman Of The Year. In the film, he makes the peon, the receptionist and the technician equal partners of his new venture.

The film does not portray the post-sellout disputes which arise in many start-ups due to unclear ownership terms in the beginning. Sometimes, such disputes get ugly and spread in the public media. The ESOP dispute after the famous sell out of RedBus.in, founded by (Phanindra Sama and friends) to ibibo.com is one such recent example. Phanindra Sama had to face a lot of public embarrassment about ESOPs given to some employees, even after not doing anything wrong apparently. It is unfortunate but true.

Start-ups are generally started by people with similar passion and vision but with complementary skills. Gradually, some more people come on board. These people vary in terms of skills and risk appetite. Many of them come with an expectation of a stable, regular paying job. They don’t wish to risk their security for a potentially high risk ownership proposition because they are not sure of the future of the company’s prospects. It is a personal choice which people make based on their own life stage and priorities. So, they consider the offer of ESOPs as an additional bonus which may or may not materialize because of their own uncertainty about continuing with the company or because of the company folding prematurely.

But, as soon as the company gets listed or sold and ESOPs become saleable, greed takes over. Now everybody wants the share. Ironically, if the founder would have lost money, none of them would have wanted to chip in to share a part of the loss.

So, while deciding about ESOP, one should be very clear and objective without getting emotional. ESOPs should not be given to all and sundry who don’t believe in the company or who don’t share the passion that drives the founders. Hiring some people purely on payroll may be expensive in the short run, but it should be considered in the long run if we believe in our own venture’s value generation potential. One should consider this as some more risk in addition to the risk already factored in.

Entrepreneurs must remember that everybody wants to own the success but failure is an orphan. Nobody wants to own it. We should be selective in choosing our drivers and peons who will suddenly develop aspirations to be millionaires without doing any extra bit for the company. During the regular days, they may have thrown all the tantrums and may have tried to avoid work as much as possible, but when the D-day comes, when the promoters decide to sell out, they suddenly woke up to the realization that “WE founded and nurtured this company with OUR blood and sweat.”

Sensibility should override sensitivity. Ensure that you don’t have to pass through the miserable and humiliating situation like Phanindra Sama had to for no fault of yours. Don’t give ESOPs people who don’t deserve it. Let commitment and merit get rewarded.

Author: Sanjay Shah

Sanjay is the author of "Business Management Simplified" which provides Practical, Actionable Solutions for Entrepreneurs. It is an all-in-one guidebook to start, run and grow a small and mid-size business to the next level. He is also an SME Business Coach, Seminar Leader and Motivational/Keynote speaker, Sanjay is based in Mumbai (India). He advises many businesses on Strategy, Leadership, Marketing, Branding, Customer Experience Management and Organization Development. He conducts various self-help seminars and workshops for companies and groups in English, Hindi and Gujarati. For more info, visit : www.SanjayShahSeminar.com

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