Using ESOPs To Attract, Acquire and Retain High-Quality Talent

With healthcare being a sensitive domain, sales can be a daunting challenge for MedTech startups. Identifying the right prospects, the proper channels, and the right sales process is critical to hitting an impressive stride from the start.

To improve your sales figures, implementing a robust sales channel is paramount. However, the picture is hardly any simpler here. Some channels take longer than others to close but come with a higher payoff. Another important factor is getting your pricing strategy right. All these factors massively influence the sales function and its activities. 

To understand sales in a MedTech startup, it is essential to start from the basics. A Sales 101 lesson is not only beneficial for a growing company; it is paramount to keep abreast of a sensitive domain and a rapidly evolving audience. We spoke to Mukul Bagga, Managing Director at Medicom Healthcare, to get his insights on the critical aspects of sales that MedTech startups should know and implement, particularly if they seek a primer in the sales domain.

Understanding ESOPs & Why They Are A Tool For Attracting, Hiring & Retaining High-Value Talent

ESOPs are employee benefit plans that offer employees an ownership interest in the company. This Plan gives Employees the Option to purchase Stock in the future (after the vesting period) at a predetermined price and then sell it after some time for the stock value at the time. 

Startups leverage ESOPs to offer employees their market value by splitting remuneration into the salary and ESOP components. The actual amount that the startup has to shell out during the vesting period (which is defined by the company and is often three years or more) is only the salary component. It allows startups to match a talented employee’s market value without paying the entire amount as remuneration. It is pretty obvious how ESOPs help startups afford high-quality talent, but how do ESOPs help startups attract and retain talent? 

How ESOPs play a role in attracting and retaining high-value talent

ESOPs offer employees a way to own shares in the company for a nominal price and sell them later for a profit. This becomes a lucrative deal for employees joining the startup. It gives them the potential to earn more than their asking price during hiring. A notable example of how profitable an ESOP can be for an employee is Zerodha, says Vijay. 

Zerodha, a financial services company, has close to 850 employees, or 85% of their employee base, eligible to exercise their ESOP as of May 2021. They are allowing employees to sell up to 33% of their vested stocks back to the company for a total worth of ₹200 crores at a self-assessed valuation of $2 billion. (Hindustan Times report)
Employees are either aware or can be made aware of the benefits of ESOPs. ESOPs have a greater chance for a profit with startups, as was the case with Zerodha, because the scope for an increase in stock price is high.

Another important aspect of an ESOP that helps in employee retention is the Vesting Period. An employee who has agreed to an ESOP can only exercise it after the company sets it. Thus, the employee is self-motivated to stay loyal to the startup, at least for this period, to exercise their ESOP option. It gives startups a way to ensure retention without having to force it.

Why would employees agree to an ESOP?

The most common question that employees ask before accepting an ESOP scheme is how a company decides the value of the ESOP? This question translates to on what metric are you splitting the employee’s CTC and evaluating their market worth. 

Setting a value for the ESOPs is vital in convincing employees it is a lucrative scheme for them. There are three approaches to this- 

  1. If a company has had a recent valuation or recently received a round of funding, it can use this valuation and FMV to convince the employee of the value of the options component in the CTC.
  1. If the most recent company valuation is not current, the company can hire an independent valuer to create a valuation report and calculate the FMV. It is, however, not mandatory but good practice.
  1. In many cases, the founder of the company or the board evaluates their company’s fair worth and sets an FMV for the ESOP. Again, this is a perfectly reasonable practice, and employees will have to trust the valuation.


How do we evaluate the success of an ESOP?

Is the ESOP scheme being well received is a question startups most often can ask. While there isn’t a direct way to judge how well an ESOP is being received, you can look at employee turnover and iteration rate to assess. So, for example, if employees are quitting well before the vesting period, one of the reasons could be they are unhappy with the ESOP scheme.

The Benefit of ESOPs for Employers

Vijay lists three critical benefits of ESOPs for startups:

  1. When an employee owns an interest in the company, their goals and motivations align with their shareholders because they are shareholders. Therefore, they deliver their best to see the startup grow because it is in their interest.

  1. Boosts employee retention and lowers the turnover rate because of reasons explained earlier.

  1. Gives startups a way to hire high-value talent for a lower remuneration by offering a specific portion of their salary as an ESOP.

Most notable companies like Ola, Urban Company, Licious, Zomato, Swiggy, Oyo, Phonepe, etc., have ESOPs as a part of their employee pay structure, which extends to employees throughout the org structure, including delivery partners and technicians.

Creating an ESOP

Creating an ESOP is not a complicated process, says Vijay. Instead, it involves five steps that he lists as guidelines for implementing an ESOP scheme.

Step 1 – Find a lawyer or law firm. The ESOP scheme should cover all legal clauses governing ESOPs – Who is eligible to take the plan, the vesting period, etc.

Step 2 – Get board approval for adopting the ESOP scheme.

Step 3 – Send the board meeting MOM to all board directors within 15 days of its conclusion and file the MGT-14 form with the registrar of companies.

Step 4 – Approve the ESOP scheme through a special resolution at the shareholders meeting (EGM) and file the MGT-14 form with the registrar of the companies within 30 days of passing the special resolution.

Step 5 – You are ready to grant ESOPs to your employees through a grant letter formally. There is NO need to increase the company’s authorized share capital at the time of the ESOP grants.

Final Word By Vijay

ESOPs have become a source of relief for startups since Covid. Many startups face depleting funds after Covid, and ESOPs offer them a way to retain their employee force without having to dip into their reserves. Thus, Covid has, in a way, accelerated the penetration of ESOPs into the startup sector, says Vijay. This, again, becomes a way to retain employees who choose to stay vested even if there are no appraisals because of the potential to earn a profit later.

ESOPs are a startup’s ally. They give startups with lesser funds the ability to hire talented employees asking for high salaries. They are a great way to motivate employees to assume responsibility. They help retain top talent, and they are a profitable option for employees.

About the author

Vijay Singh Rathore is an Investment Banker, advisor to VCs/PEs/HNIs and founding Partner at Nucleus Advisors. He also works closely with Founders to help them in Financial Modeling, Investor Pitch Deck, CFO Support, and Fundraising. He specializes in: Financial Due Diligence, Valuations, and Investor Relations. He is Hyperactive in the Startup Community. He has earlier worked for ICICI Bank as an Internal Auditor of Retail Liabilities Group. He is a Qualified Chartered Accountant and holds a Diploma in Information System Audits. He is currently pursuing a Registered Valuer Course of IBBI. 

You can connect with him here:

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