As investors in high growth tech businesses, it’s typical that our portfolio companies have an employee share option plan (ESOP) in place. ESOPs allow staff to feel ownership in a business and lets them benefit from growth in the value they directly contribute to. This is why ESOP is a common device around the world for ensuring alignment between founders and their employees.

However, ESOP allocation requires nuance and judicious management. This is because not all staff value equity in quite the same way as founders.

Some staff would simply prefer more cash, and see their ESOP allocation as somewhat of a lottery ticket. In this case, it may make sense for founders to pay them more cash upfront, and if needed, fund that via selling the equity to people who deeply value the shares (often investors). Others understand the importance of owning equity, and they might be very happy to receive much less cash and more options.

One model founders should consider is to offer joining staff three compensation offers: one which is all cash, another which is a blend of cash and options, and a third which is low cash but high in ESOP. Let the staff decide. Then founders aren’t diluting unnecessarily and staff receive more of the compensation that they value.