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Why Bolster Open-Sourced its Employee Stock Option Plan (ESOP)
One of the most iconic and exciting parts about joining an early-stage startup is the risk and reward calculus associated with vesting in early-stage equity grants that could increase in value dramatically if the startup is successful and undergoes explosive growth.
To quote Paul Graham’s legendary 2012 essay called ‘Startup = Growth’:
“A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.”
In his essay, Graham goes on to say that this growth usually has three phases:
- “There’s an initial period of slow or no growth while the startup tries to figure out what it’s doing.
- As the startup figures out how to make something lots of people want and how to reach those people, there’s a period of rapid growth.
- Eventually, a successful startup will grow into a big company. Growth will slow, partly due to internal limits and partly because the company is starting to bump up against the limits of the markets it serves. [5]”
Having been involved with some notable Silicon Valley successes, we can confidently say that an equity stake in these companies, and its long term potential, was the most exciting part of the overall compensation picture. This is true to the extent that we agreed with the company’s overall thesis and had confidence in its ability to execute. With that knowledge, we could judge the company’s probability of reaching phase 3 (will they succeed?) and where it might sit between phases 1 and 2 (how early is it?).
Lastly, the earlier a company is on this journey, the more an early employee can shape and contribute to the company’s success, which appeals to those who value autonomy and deal poorly with authority (:D) However, over the past nine years, we’ve noted that some ESOPs are sorely lacking in terms of long term incentive alignment between founders and early employees. There are sometimes loopholes inserted into these agreements that disadvantage the employee in terms of their ability to retain equity and/or “cash-out” after their eventual separation, thereby drastically reducing their perceived value.
It seems everyone who has been involved with tech startups in New Zealand knows someone with a negative story about employee equity, and the nuance of these stories can be lost in translation. Many kiwi companies seem to prioritise equity retention to the detriment of employee buy-in, and at the cost of key player burnout. Rather than the excitable, risk-indulgent team a startup needs to beat the odds, you find yourself with burned-out husks hanging on for a steady paycheck and Friday drinks. If we are serious about making New Zealand a tech hub in a post-Covid world, as tech founders, we absolutely must sort this one out - as the end result is that founders are unable to effectively recruit talent due to the inability to use early equity as a selling point.
At Bolster, we are on a mission to change the state of employee equity in New Zealand to align the interest of founders more effectively with employees. Our first step in this campaign will be to open source our extensively modified ESOP in the hopes it may serve as a resource for conversations around what a robust employee equity program could look like. While we feel that our ESOP much more effectively represents the employee’s interests, it can still be improved, and we welcome others to fork their own ESOP from it if they so choose. Employees should also feel free to use our ESOP as a reference point to assess the degree to which equity is a legitimate part of their overall compensation.
It’s Bolster’s hope that together we can more effectively incentivise our scarce technical talent to do great things from New Zealand.
Mā te wā
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