How much equity should I give to my first employees? How do I deal with company shares at different stages that my company is undergoing? How do I create a work environment where my employees feel part of it? How do I create a fair and consistent plan in the long run?

These are just some of the questions we’ll try to address and explain when and how employee stock option plans are needed in your company and what exactly you should do, depending on your current growth stage.

In this article, we'll explore how ESOPs can benefit your company at different stages of its life cycle, guiding you in what steps you need to take in each stage of growing your company, what resources you need, and how much equity you should allocate.

Why do startups need employee stock option plans?

Employee stock option plans, or ESOP, are a form of employee benefit plan that gives employees an ownership interest in the company by providing them with company stock, often at no upfront cost to them.. In the context of startups and growing businesses, the strategic implementation of these plans can play a tremendous role in aligning employee engagement with the company's goals, thereby helping to build a sense of ownership, dedication, and shared purpose during day-to-day activities.

ESOP benefits for employees:

• Early financial savings: Employees become owners and directly benefit from the company's success through profit sharing or stock ownership. This can help them build wealth over time.
• Increased job security: Employee-owned businesses tend to be more stable and profitable, which can lead to greater job security for employees.
• More engagement and motivation: When employees have a stake in the company's success, they are often more motivated to work hard and contribute to its goals.
• Greater voice and influence: Employee-owned companies often have more democratic structures, giving employees a greater say in running the company.

Benefits for businesses:

• Improved productivity and performance: Studies have shown that employee-owned businesses are more productive and profitable than traditional businesses. This is likely due to the increased motivation and engagement of employees.
• Better decision-making: Employee owners tend to think more about the company's long-term health, leading to better decision-making.
• Stronger company culture: Employee ownership can foster a more collaborative and cooperative company culture.
• Easier succession planning: Employee ownership can provide a smooth ownership transition when a founder or owner wants to retire.

ESOP pools by startup growth stage

Pre-seed stage — thinking ahead

This stage is often characterized by high uncertainty and high risk, as you’re still testing whether there’s a market fit for your idea.

While implementing an ESOP might be premature at the pre-seed stage, you can start planning for it. During this phase, you focus on developing the business concept, securing initial funding, and perhaps bringing on a few key team members. You should consider:

• Future talent needs: Outline the key roles and skills needed to grow the business. An ESOP can provide a way to attract talent when cash resources are limited by offering a share in the company’s future growth.
• Investor expectations: Early-stage investors often expect to see a plan for an ESOP, which indicates a commitment to building and retaining a core team.

At the pre-seed stage, valuations are typically low and highly speculative, usually in the range of €500K to €3M. The valuation is largely based on the business idea's potential, the team’s experience, and the perceived market opportunity.

If you decide to set up an ESOP so early, allocate a portion of equity (typically 10% of total equity) specifically for these early hires and key employees. This is critical in attracting and retaining talent without a large cash outlay. Early on, it’s easier to allocate a significant percentage to an ESOP before valuations rise and the pool’s value increases.

At this stage, an ESOP can serve as a powerful incentive for early employees who are taking a risk by joining a young company. These employees often play essential roles in getting the company off the ground, and equity offers them a stake in its potential success. An early ESOP plan helps create alignment and commitment among your team from day one.

The fact that you have an ESOP pool does not mean you have to allocate it all from the start. By creating a sizable ESOP early on, a company can cover a significant portion of its future hiring needs without having to add more equity to the pool at a higher valuation. This minimizes the need to issue more shares later, which would dilute the founders' and early investors’ stakes more heavily due to the company’s higher valuation.

Source: Rewarding talent by Index Ventures

Seed stage — implementation time

At this point, the company shows initial traction through indicators like early sales, user growth, and milestones in product development. Investors now seek evidence that the business can scale, and valuations start to reflect these tangible metrics. In the seed stage, valuations rise as traction builds; in Europe, they typically range from €2M to €8M, depending on factors like sector, market response, and growth potential.

With a validated business model and either early revenue or funding rounds underway, setting up an ESOP becomes a priority. Here’s why the seed stage is ideal for creating an ESOP:

• Attracting talent: As demand grows for specialized skills, offering equity can help bring in top talent, especially when cash is limited.
• Aligning interests: An ESOP aligns the team’s goals with long-term company success, encouraging ownership and commitment.
• Preparing for growth: Setting up an ESOP early creates a structured framework to support future scaling efforts and funding rounds.

Creating an Employee Stock Ownership Plan (ESOP) during the seed stage is a strategic step that can set your startup up for success as it scales. If you don't already have an ESOP in place, the seed stage is definitely the time to start one, and we strongly recommend doing so. Here’s why an ESOP matters at this point:

Creating an ESOP during the seed stage is a strategic move that can set the company up for future success. If you haven’t already, we strongly recommend establishing one now. Typically, about 10% to 12% of equity is allocated to the ESOP pool at the seed stage, providing a reserve to attract essential talent without excessive dilution in later rounds.

Beyond the founding team, seed-stage ESOPs often include early employees who joined close to inception and play a vital role in early growth. By awarding these employees equity, you align their incentives with the company’s success, building loyalty and engagement that benefit the company as it scales.

Series A stage — adjusting and expanding

In the European market, Series A valuations span a broad range, typically between €8M and €500M+, depending on factors like growth rate, market potential, and revenue trajectory. At this stage, larger institutional investors are often drawn to a startup’s growth potential.

To close a Series A round, startups generally offer investors 10% to 25% equity, depending on the valuation and capital raised. This equity allocation is a balance between securing sufficient funding and minimizing dilution for existing stakeholders.

Having an ESOP at the Series A stage can be highly advantageous, as the company enters a period of rapid growth. An ESOP pool of about 12% to 15% is recommended, supporting the hiring of new talent and realigning incentives for existing team members who may experience dilution from recent funding.

At this stage, ESOP eligibility is often extended beyond the founding team to include senior management, as well as essential hires in sales, marketing, and operations. Offering equity to these roles promotes a unified culture, encouraging team members to contribute to scaling the company effectively.

As the company scales—possibly expanding into new markets or accelerating customer growth—the ESOP may require adjustment to reflect these changes:

• Valuation adjustments: As the company's valuation increases, the value of equity grants also rises, so adjusting the ESOP helps ensure incentives stay aligned with the company’s current valuation.
• Supporting new hires: With rapid growth, expanding the ESOP can ensure competitive equity offers to continue to attract top talent.
• Retention: Adjusting ESOP allocations can also aid in retaining critical employees, which is essential during high-growth phases.

At the Series A stage, these adjustments help align the ESOP with the company’s growth objectives, supporting both talent acquisition and retention as the startup scales.

Series B and beyond — refinement

At the Series B stage in Europe, valuations generally range from €50M to €1B+, reflecting a stable business model, consistent revenue, a solid customer base, and in some cases, profitability. Investors at this point are backing a proven company aiming to solidify its market position.

Companies typically offer 10% to 20% equity to Series B investors, striking a balance between raising substantial capital and minimizing dilution for existing shareholders.

The ESOP pool at the series B stage often targets 15% to 20% of equity, focusing on retaining key personnel and incentivizing senior leadership and essential technical talent. These allocations are designed to align the team with the company’s long-term vision.

For companies at Series B and beyond, ESOP strategies evolve to emphasize retention and motivation for executives and employees who can drive innovation, oversee large-scale operations, and support ongoing growth. Even with an established ESOP, considerations at this stage include:

• Refinement for retention: Structuring equity grants to secure high-performing talent and leadership crucial for sustaining growth and fostering innovation.
• Alignment with long-term goals: ESOP allocations that reinforce long-term objectives, whether preparing for a public offering or maintaining a strong position in a competitive market.

The impact of dilution on ESOP at different growth stages

As a company grows, the ESOP pool generally stays within a range of about 10% to 20% of total equity. However, the purpose and allocation strategies within the pool adapt to meet the evolving needs of each stage.

Early-stage employees often receive larger individual allocations, especially those hired early on, who contribute to foundational work and are compensated partly with equity due to limited cash resources. Over time, while the ESOP pool size may increase slightly, individual equity grants often become smaller as company valuation rises, making each share more valuable. Founders and early team members usually hold a larger equity percentage, while later hires receive smaller percentages but with higher share value due to the company’s growth. This balance rewards early contributors' risk-taking and provides newer hires the opportunity to benefit from a more mature, stable company.

As employees leave before fully vesting their equity, reclaimed shares can be redistributed or reserved for new hires, creating natural fluctuations in the ESOP’s cap table percentage. Dilution, which happens as the company issues new shares (typically during funding rounds), reduces the ownership percentage for existing shareholders, including ESOP participants, impacting the value of current equity grants and influencing future ESOP allocations.

Key considerations in managing ESOP dilution:

• Decrease in ownership percentage: Each new share issued lowers the relative ownership stake of existing shares, including those within the ESOP. This reduction in ownership percentage can impact employees' perception of their equity’s value, potentially requiring adjustments to maintain alignment with company goals.
• ESOP refreshes: To counter dilution’s effects on employee incentives, companies often refresh the ESOP by allocating additional shares. This maintains an attractive pool of equity compensation for both current and future employees.

Valuation and exit implications: Although dilution can decrease the relative ownership percentage, an increase in valuation ideally offsets this by raising the absolute value per share. This balance is crucial for ESOP participants, as it affects their potential return in an acquisition or IPO scenario.

• Strategic planning and communication:* Effective planning for dilution impacts, especially on ESOP allocations, is essential. Transparent communication with employees about how funding rounds and dilution affect their equity grants builds trust and alignment.

Build a culture of ownership today!

ESOPs are viewed as instruments capable of positively impacting company performance through motivation, productivity, financial enhancements, employee engagement, and competitiveness.

While the implementation and long-term effects may vary based on specific contextual factors within each company, you are not alone on this journey.

SeedBlink has brought a team of financial and legal experts closer to help you take the first steps in this journey. The ESOP Design program guides you through creating, launching, and managing the whole Employee Stock Option Plan without hassle. You'll be connected with legal and tax advisors to ensure your plan and program meet regulatory approval and align with the best tax practices.

If you already have an ESOP in place but want a streamlined, fully digital way to manage it, explore the SeedBlink ESOP management platform.

Manage your ESOP with SeedBlink