Startups like Flipkart, Snapdeal, OYO Rooms, Lenskart have entered the Hall of Fame as far as the Startups community is concerned. A pertinent question that comes to mind is how these ventures have become so successful and why not all Startups manage to succeed? What all has contributed in their success stories and making them reach the level at which they are today? Let’s find out…
No one is born as a readymade performer. All big players of the corporate sector started with everything less in their hands. So what made them survive and build to a level which is now admired by all young minds who wish to become like them.
It is clear that there has been a huge amount of hard work, discipline, clarity in goals, ambition and guts. But is that enough to get into the billion-dollar club? There exists no single answer for this. A right effort, on the right time, with the right opportunity will only result into wonders.
The business environment is affected by internal and external factors. An entrepreneur cannot control the external factors affecting the business to a great extent but the command of internal factors is in his very hands. Human Resource is one of the most important among the internal factors in turning a business story into its success story.
Employees are the stepping stones which need to be nurtured in order to build a strong foundation that leads to growth. Contrary to this, people generally fail to pose trust into new ventures, which is even correct, as a startup is neither in a position to pay attractive packages nor it can assure a sure-shot success / profits out of its endeavors.
But this is not the end of the story. Early stage companies are high-risk investments and many fail. In order to attract employees, startups need to be able to offer something different, such as the prospect of a share in the upside should the company go on to be successful. Entrepreneurs need to chalk out strategies which enable them to create a win-win situation. The best and most trending incentive for employees is to make them partner in the growth of the business by making them co-owner.
Familiar name of this strategy is ESOPs i.e. Employee Stock Option Plans. This is a mechanism of sharing equity ownership of the business with its employees thereby making them work in a manner as if they own the company. ESOPs are useful in the way they align the interests of employees and owners in the success of a startup.
The major benefits reaped by ESOPs include staff loyalty, an increased ability to hire high-quality people into the business, alignment between individual & organizational goals, wealth creation for employees, greater efficiency & effective outputs arising out of sense of intrapreneurship among employees.
At the same time, ESOPs also allow startups to minimize the cash outflow in the form of salaries and that cash rather be used in the varied business operations. Although there are a number of share-based compensation strategies that include plans like, ESPS, RSUs, SARs, Phantom Stocks, Sweat Equity etc. However, the one which is most prevalent as well as beneficial for the startup community is ESOPs.
Another face of the issue is the investors, venture capitalists and all other financing bodies whose investments are the biggest lifeline of the startups. The funding is the only key factor that takes a startup to its next level and aggregate it towards the growth stage. However, the angel investors as well the incubators look for credibility and future prospects of a venture before putting their money at stake.
A strong and dedicated work force gives even these Investors a confidence that the key employees who are responsible for business development will not turn out immediately. So much so, that even these Investors stress upon the Startups to have ESOP Schemes in their organizations.
In such a scenario, ESOPs are again being actively used by almost 90% startups who either are already angel-backed or are looking for such arrangements.
However, this is ultimately in the hands of people who are running the business. It is pertinent to mention here that ESOPs would benefit both to the employees and employers only if the value of Company’s stock rises. Growth & development of a business is backed by the smart work, effectiveness, innovation & efficiency of its human talent. ESOPs are the most effective & attractive tools of modern times that actually has given remarkable outputs to the ventures who have employed it.
Now, a bigger question that arises is how to formulate an ESOP Plan, how much to share with the employees, what should be the payment modalities whether to offer fresh shares or Promoters to dilute their own stakes etc. These questions gain more significance from a Startups point of view.
Guest Author : Mohini Varshneya, Assistant VP, Corporate Professional. She at Corporate Professionals – esoponline.in, is providing complete solutions to startups that are struggling with any such questions in their minds regarding how to come up with a suitable strategy which leads to engagement of their key employees without paying them huge chunks of salary. You can connect with her at [email protected].