On September 28th, our friends from ANIS, with the support of Institutul de Excelență în Antreprenoriat, tackled a subject dear to our startupper's heart: All Things Equity - Navigating Startup Shares & ESOP Strategies through an engaging event.

During the two panels, the goal was to have an open conversation about the best practices of efficient capital management. The first panel set up the evening by introducing legal, financial, and business best practices that startups can learn and apply directly from those facing these challenges.

Later, the evening continued with ESOP Essentials and how founders and VCs can build effective stock option plans together. In these exciting conversations, our colleagues, Radu Georgescu - Chairman of the Board SeedBlink, and Andrei Hâncu - General Counsel SeedBlink, were joined by a series of local industry leaders, entrepreneurs, investors, and legal experts, such as:

• Sergiu Negut - Co-Founder, CSO, Board Member Fintech OS
• Marius Istrate - Chairman of the Board Techangels Romania
• Anca Grigorescu - Partner bpv GRIGORESCU STEFANICA
• Valentin Filip - Managing Partner Fortech Investments

Equity is a company's ownership, one of a startup's most important assets. It attracts and retains top talent, compensates founders and early team members, and funds growth. However, equity management can be complex and challenging, especially for early-stage startups.

While startup founders often struggle with financing strategies and capital management, events like these provide the right context to understand what local experts went through and their strategies and connect with fellow entrepreneurs going through the same struggles, making room for connection and turning vulnerabilities into strengths.

These events can help address this problem by giving founders the knowledge and resources they need to distribute their shares correctly. These events can also promote a culture of clarity and transparency in the startup ecosystem.

Panel 1: Mastering ESOP & Equity Management: Legal, Business, and Financial Best Practices for Startup

Equity is a valuable asset for startups, and it's important to manage it carefully. By avoiding common mistakes and following best practices, you can use equity to attract and retain talent, raise capital, and motivate employees.

Let’s see how we can do it right and what learnings we can apply from this event!

Common mistakes in managing your equity:

Founders can either have too little or too much equity, affecting the company.

On the one hand, founders may need to allocate more equity to themselves when creating the company or in the first fundraising round. It can make attracting and retaining top talent difficult and give investors too much control over the company.

On the other hand, founders may give away too many equity shares early on, losing their majority stake. It can make it difficult for the founders to make decisions in the company's best interests, and it can also make it more difficult to raise future funding rounds.

Best practices recommend that founders have a majority stake until reaching Series B. It gives them the control to make important decisions about the company's direction and future.

The next mistake in some cases is uninvestable cap tables.

An uninvestable cap table is a major red flag for potential investors, and it happens when founders own too little equity. Most of the time, we find this situation in spin-off companies from bigger companies, and various factors, such as complex ownership structures, unclear terms, and disputes over ownership, can cause it.

• Too many shareholders: Many can make it difficult to manage the cap table and make it more expensive to raise capital.
• Complicated ownership structure: A complex ownership structure can make it difficult for investors to understand who owns what and how much. It can lead to confusion and mistrust.
• Disputes over ownership: Disputes over ownership can damage investor confidence and make it difficult to raise capital.
• Founder equity too high: If founders have too much equity, it can make it difficult to attract investors looking for a significant return on their investment.

The last thing mentioned during the panel discussion was — dead equity — which happens when a shareholder leaves the company but still owns equity. A solution to this is to use reverse vesting, which allows the company to "claw back" unvested equity from a departing founder.

What should founders know before implementing an ESOP?

There are different factors that companies may consider when allocating shares in an ESOP program, such as the employee's length of service, their contributions to the company's culture, and their commitment to the company's long-term success.

• Job title or seniority & Salary: Employees may be allocated shares based on their seniority or salary. It is a straightforward way to give shares, but it can also lead to some employees having significantly more than others.
• Performance: Employees may be allocated shares based on their performance. It is a more complex way, but it can help ensure the employees making the biggest contributions to the company get what they deserve.
• Equal allocation: All employees may get an equal number of shares. It’s the simplest and most egalitarian way, but it may not be fair or effective in all cases.

Additionally, there are some restrictions on how employees can sell their shares in an ESOP program. These are designed to protect the interests of the company and the other employees in the program. Here are some specific examples of restrictions on how employees can sell their shares:

• Vesting periods: Employees may be required to hold onto their shares for a certain period before they can sell them. It’s known as a vesting period.
• Right of first refusal: Employees may be required to sell their shares back to the ESOP or the company if they leave.
• Price restrictions: Employees may be required to sell their shares at a certain price.
• Notice requirements: Employees may be required to give the company advance notice before selling their shares.

Other considerations founders should keep in mind when looking to allocate ownership to their employees may refer to:

• Good leavers vs. bad leavers: create a scenario on what happens to the shares when employees leave the company.
• Give equity gradually. It can be a great way to incentivize employees to stay with the company long-term. It also allows founders to retain more control of the company in the early stages, when it is most important.
• Give smaller percentages of shares to more employees or all employees, not just the top leaders.
• Keep your ESOP plan as flexible as possible to include potential other people, such as international employees.

Panel 2: ESOP Essentials: Founders & VC Insights on Building an Effective Stock Option Plan

In the second panel of the All Things Equity event, Marius Istrate, Radu Georgescu, and Sergiu Negut shared their insights on ESOP essentials and building effective stock option plans.

Why do companies introduce ESOPs?

There are many reasons why companies should consider introducing ESOPs. For one, ESOPs can help companies attract and retain top talent. Employees who own shares are more likely to be invested in its success and less likely to leave for other opportunities.

Additionally, ESOPs can help align employee interests with those of the company. When employees own shares in the company, they are more likely to work hard to help the company grow and succeed. Share the work, share the worth. Finally, ESOPs can create wealth for employees. If the company's stock value increases, employees can sell their shares for a profit.

Who receives ownership in my company?

When deciding who should receive ESOP shares, it is important to consider the company's business model and goals. For example, a product-driven company may want to allocate more shares to employees responsible for developing and improving the company's products. On the other hand, a sales-driven company may wish to assign more percentages to employees responsible for generating sales and revenue.

Some examples of how employees get shares in a product-driven company include:

• Based on the employee's contribution to the product: Employees who have contributed significantly, such as by developing new features, improving performance, or fixing critical bugs, may be allocated more shares.
• Based on the employee's role in the product development process: Employees who play key functions, such as engineers, product managers, and designers, may be allocated more shares.
• Based on the employee's experience and expertise: Employees with more experience and knowledge in product development may be allocated more shares.

For sales-driven companies, the ESOP program aims to incentivize and reward the employees who drive sales. It could include salespeople, account managers, and other roles directly involved in generating and closing deals.

Some examples of a sales-driven company might give ownership based on:

• The employee's sales performance for those who have consistently generated high sales.
• The employee's customer relationships for people with strong relationships, and managing sensitive customers.
• The contribution to the process for employees who play key roles in sales, such as generating leads, qualifying prospects, and closing deals.

Best practices for equity management in a startup

• Start early. Start thinking about equity management before your company enters the growth phase. It's important to have a plan in place early on so that you can attract and retain top talent. Also, VCs usually see this as a sign of trust and commitment and are more keen to invest when such a plan is prepared or in place.
• Be transparent. Employees should understand how ESOPs work and what their potential benefits are. Be clear about the strike price, vesting period, and other important details.
• Use software to automate the process. Many software solutions can help you automate the equity management process, but we recommend SeedBlink, an all-things equity tool. ;) This can save you time and hassle and help ensure your fair and accurate equity plan.

Other insights from the panelists

• Marius Istrate emphasized the importance of communicating the value of ESOPs to employees. He suggested discussing the option's value instead of the percentage and presenting different scenarios that could happen in the next 4-5 years.
• Radu Georgescu shared his experience with ESOPs in the US and Romania. He noted that the Romanian ecosystem was initially skeptical of ESOPs, but the success of UiPath has helped to change attitudes.
• Sergiu Negut shared his experience with ESOPs at some companies, including Regina Maria and Fintech OS. He emphasized the importance of having a dedicated person to manage equity, even in early-stage startups.

If you want to learn more about equity management and how to implement an employee stock option plan for your company, check out SeedBlink’s blog or contact us, and we’ll be more than happy to help you.