What is an ESOP?
An Employees Share Option Plan (ESOP) is an employee benefit used to attract and retain talent. ESOPs are a form of equity compensation that enables the employee to purchase options of the company they work for, after a prescribed time and at a discounted price. The prescribed time is referred to as the vesting period, while the discounted price is known as the strike price.
The vesting period is the duration you need to work for your employer before you can be eligible to own your options and different companies offer varying vesting schedules. Typically, this period is four years, with a minimum of one year to qualify. This minimum period is referred to as a cliff period.
The wording in your contract will probably be something like this: You will receive a stock award of 1,000 options subject to a vesting schedule of 4 years with a 1-year cliff. Practically, this means, you will receive 1,000 options at the end of 4 years. However, you only qualify after one year and forfeit your award if you leave the company before one year is over. After year one, you will receive 250 options. Thereafter, you are awarded 62.5 options per month (pro-rated over 36 months) until the expiry of the period.
Types of Stock Options
Stock options are different, so check your contract’s wording. They can be Incentive Stock Options (ISOs), which are assigned to employees only and, depending on the country, may have different tax obligations to other company shares. NSOs or non-qualified stock options are not restricted to employees and are open to advisors, investors, and vendors. Lastly, restricted stock options (RSOs) vest only when a particular set of criteria are met. These types are often used as performance incentives but can apply to other measures agreed upon by the company and the employee. Note the wording here. We say option because you must opt-in to buy your shares by paying the strike price.
ESOP at Wasoko
In the past, the general practice has been for companies to award ESOPs only to senior executives. However, at Wasoko, we believe that all employees contribute to the company’s success, and as such, we grant all full-time employees stock options. We endeavor to provide our employees with an opportunity to sell these options during secondary sales. As such, our employees do not have to wait for the company to go public to enjoy the fruits of their hard work. The majority, however, are holding their shares which continue to appreciate in value.
Benefits of an ESOP plan?
As part of our compensation package, the ESOP at Wasoko has helped us attract talent that would otherwise be beyond our reach. The shares supplement the cash component of the compensation package, which makes the overall package very competitive. The ESOPs are also a great retention strategy, reducing employee turnover above the market average.
With the secondary sales, we can provide our employees with some liquidity. Employees participating in secondary sales have been able to reap the benefits of their hard work, directing their proceeds to investments, purchasing property, and pursuing further education without going into debt.
However, the most significant benefit is that employees see themselves as owners of Wasoko and therefore go the extra mile. We recently raised $125M in our series B round with a $625m valuation due to our exponential growth in 2021. Our growth is attributed to our employees, who understand that their hard work translates to company growth, increasing Wasoko’s valuation and the value of their shares.
In the tech startup space in Africa, ESOPs are becoming a standard benefit offered to employees as part of their total compensation regardless of the level of seniority within the company. It’s exciting to see the tech space trail blaze in this area of employee compensation, and I can’t wait to see how the landscape changes.
Carolyne Mwaura (Global Head of People): Carolyne has over 16 years of experience as an HR professional and has been with Wasoko for three years, originally working in the USA for ten years before returning home to Kenya. Before joining Sokowatch, Carolyne was the Group Head of HR for Sub-Saharan Africa at Ringier One Africa Media, overseeing hundreds of team members across eight African countries. Before that, she was the East Africa Talent Manager at ALN/ Anjarwalla & Khanna. Carolyne is a certified Counselor by the Institute of Human Resource Management (IHRM) and a certified Coach by the Strathmore Business school. She holds a Higher Diploma in Human Resource Management from IHRM, a Law degree from Western State College of Law (California, USA), and a Psychology degree from California State University Long Beach (California, USA). LinkedIn