How to encourage more amazing people to join #startups – for #investors & #entrepreneurs

In the last 2 weeks I have had to catch up on several shareholder’s agreements that startup founders have sent my way to review.

It is very disappointing to see that most of the Indian founders keep 10% or less towards Employee Stock Option Plans.

There’s no better way to say this. This is silly, very backward in its thinking and has no justification.

I dont buy the argument that employees dont value stock options. They dont understand them and hence they tend to ignore them.

As an investor and startup founder it is your duty to make sure employees understand the value of stock options.

All successful startups will agree that the startups with the best people usually wins. Not always the best product or best technology but the one with the best people.

The best people dont come cheap. They have multiple options – Working at a large company, working for themselves or striking it on their own to build their own startup.

If you want to encourage the best people to consider startups, you not only have to pay well, but also give them enough incentives and “upside” to ensure their success.

I am also very disappointed that investors are not asking this of startup founders. The long term viability of the ecosystem depends on the best folks making good money so they can become entrepreneurs or investors again.

The wealth needs to go around. 2-3 folks in any company making a lot of money while the rest slave away for paltry sums is a recipe for a host of B and C players being early startup employees. None of us want that.

I dont think this is very sustainable.

If you are a startup founder, one of the most important things you need to do is to ensure your employees make a lot of money as well if there is a big upside.

I want to be a big force of this change for the good.

Starting today (as part of Microsoft Ventures and my own personal investments) I pledge I will ensure that every startup (starting in India) has at least 15 if not 20% of the shares kept aside for early employees. I also want to make sure that the shares do get granted to employees. Finally I also will make sure that our portfolio will share the wealth with the employees as well. I understand that means we might have to take a haircut on valuations or even reduce our ownership. So be it.

If any of our co-investors do not agree to our model for equitable employee contribution, we will not do the deal.

Be the change.

9 thoughts on “How to encourage more amazing people to join #startups – for #investors & #entrepreneurs”

  1. very pertinent topic. from what I have seen – the issue is both supply and demand. most people in India don’t care for a stake. the simplest way to find this out is to see whether they are willing to make a salary, equity tradeoff. almost no one’s willing to do this (at least in my sample set – which i hope is at least somewhat representative).

    that’s not the case in US. startups survive by offering equity in exchange for lower cash burn. so the question is why would indian entrepeneurs offer equity when they get nothing back in return? (they might get higher employee loyalty if the going gets good – but they are gonna get higher loyalty under those circumstances anyway!)

  2. Hi Mukund,

    Great Post. I am completely in agreement of your thoughts. I had some bad experiences in this regard. I do pledge, I want to be fair in this. Request you to share good examples of a ESOP agreements/material to structure better incentives for early employees. That certainly will help me in future.

    Thanks
    Murty

  3. Many of my clients are following this and offering significant amount of equity. They were able to attract good talent because of that. I agree with Mukund , we need these kind of initiatives in startups.

  4. Reblogged this on CODES OF LIFE and commented:
    It’s all about ‘best people’ and not always ‘best product’ or ‘best technology’… excellent words by Mukund.

  5. I wonder where you saw a bad cap table recently ๐Ÿ™‚

    There’s an interesting post by Fred Wilson (http://www.avc.com/a_vc/2011/09/mba-mondays-cap-tables.html) on cap tables. ALso has about 20% for esops. 40% for founders, and 40% for investors. Sounds fair.

    Btw, how does it work in India when you have unassigned options at exit? What if this is done through an ESOP trust? Do VCs generally take that stake as their own or is it just discarded (and everyone’s stake goes up pro rata)?

    1. This is a brilliant case in point. I have recently been discussing on what to offer someone, who comes on board as one of the CFO/CTO role, a while after the company has done some initial work. That in case you weren’t paying them anything. And another entrepreneur friend pointed out, that one bucket of shares has to be “saved” for the employees of the company, as initially, the only incentive they might have to join the company would be these in form of ESOPs. And you can’t afford to do all calculations on “your own” 100%, which changed the whole equation.
      This post by Fred Wilson is very useful. Thanks Deepak ๐Ÿ™‚

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