To illustrate his point, let’s look at a common scenario: two early-stage tech companies, both with brilliant ideas. The first founder, Anna, grants early employees large chunks of equity just to get them in the door. The second founder, Ben, spends a week creating a framework for his ESOP allocation before making his first hire.

A year later, Anna faces a crisis. Her top performer engineer, hired six months in, discovers that an early marketing executive who has since underperformed holds twice her equity. The engineer feels undervalued, her motivation dives, and she starts taking calls from recruiters.

Ben’s company, meanwhile, is thriving. His team understands exactly how and why equity is distributed. They see a clear link between their performance, their potential, and their stake in the company's success. When it’s time to raise a Series A, investors are impressed by Ben’s clean cap table and strategic approach. Anna’s, on the other hand, is a red flag.

The difference isn't the intent. Both founders wanted to motivate their teams. The difference was the strategy.

Defining the ownership pool

Before any equity can be distributed, a founder must decide how much they have to give. This is the ESOP pool – the total percentage of company equity reserved for current and future employees. The size of this pool is a critical decision that signals a company's commitment to employee ownership.

Typically, a seed-stage company will set aside 10% for its ESOP. In the competitive US market, this often grows with each funding round, reaching 15% at Series A and sometimes climbing as high as 20-25% by Series D. European companies have historically been more conservative, often keeping the pool at a steady 10%. However, regardless of geography, the key is to reserve enough to reward the current team while keeping enough powder dry for the game-changing hires needed for future growth.

Of course, with every new funding round comes the spectre of dilution. As new capital comes in, new shares are issued, and every existing shareholder’s percentage of ownership shrinks. Smart founders don't fear this. They plan for it by "topping up" the ESOP pool during funding rounds, ensuring it remains a powerful incentive. After all, owning 0.5% of a $100 million company is far better than owning 1% of a $10 million one.

The art and science of allocation

Once the pool is set, the real work begins deciding who gets what. This is where strategy must trump simple math. Tying equity grants directly to an employee's annual salary is a solid starting point, as it grounds the award in their established value. But it's only the beginning.

A truly fair and motivational allocation model considers a blend of weighted factors. It's an equation every founder must solve for their specific company:

Grant Value = Annual Salary x Allocation Coefficient

The magic is in the allocation coefficient. This is a multiplier created by evaluating employees across several strategic criteria:

• Seniority and impact: a principal engineer architecting the core product should have a higher coefficient than a junior team member
• Potential: is this person a steady contributor or a future leader who could change the company's trajectory? Equity is a powerful tool for retaining those superstar employees
• Department and role: an engineer building the product may be more motivated by long-term equity than a sales executive who thrives on short-term cash commissions. The allocation should reflect these different motivational drivers
• Tenure: loyalty and long-term commitment should be rewarded. Someone who has been with the company for five years has weathered more storms than someone who joined five months ago

By assigning weights to these criteria, a founder can build a logical, transparent framework. This process isn't about removing human judgment – it's about making that judgment consistent and fair. It allows leaders to move from making gut-feel decisions to executing a clear, defensible strategy.

Ultimately, an ESOP is a story a founder tells their team about the future. It’s a chance to turn employees into partners and transform a job into a mission.

It’s a story too important to be left to chance.

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