Tag: startup culture

Doing stock options right

PJ tweeted this excellent summary & this topic needs more details.

Best practices in ESOPs in India

This post covers:

1. How founders need to look at ESOPs
2. How we handle ESOPs at Markk
3. What founders should do if they make a promise & do not have the paper work in place (when an exit event happens)

  1. Founders and ESOPs

One of the biggest motivations for me as a founder is when people who trust you & your vision early days make money. A lot of money. This includes all shareholders like investors, but employees come first.

As a founder you need to realize that wealth creation happens best when you take everybody along. It is also in your selfish interest to let people have ownership and create a win-win.

Recommendation: Have a 10% pool for ESOPs (to start with)

2. How we handle this at Markk

A benchmark against PJ’s table above

TopicMarkk PolicyScore
Who is eligible for ESOPsEverybodyOutstanding ✅
Vesting period4 yearsOutstanding ✅
Vesting schedule10+20+30+40Average 🆗
Allotment isTime LinkedOutstanding ✅
Vesting starts fromJoining dateOutstanding ✅
Top-up of ESOPsNot definedAverage 🆗
Vesting on leavingVested OptionsOutstanding ✅
Vesting on ExitAcceleratedOutstanding ✅
Sale of vested stocksPermission requiredAverage 🆗
Sale of ESOPsFacilitatedOutstanding ✅
BuybackNot defined–
Exercise PriceReasonable PriceGood 👍
Holding period7yrsGood 👍
ESOPs policy at Markk

There are 3 additional sections that need to be considered

Death / DisabilityAutomatically vested to heir / employee
Applicable to freelancersYes! ✅
Cash out Vs StocksYes! ✅

Vesting Schedule:
A equal vesting schedule should not be done in early stages of your startup. Startups are tough and take years before things add up, and majority of people will leave before things start looking good.

If you keep equal vesting each year you do not reward patience and also end up probably losing lot of equity for people who are not willing to play the long game.

Top-up of ESOPs:
Though we have already topped ESOPs for most employees (either based on performance or in lieu of salary), this is something we will define.

Sale of vested stocks:
A no permission situation works well once the startup is big and secondary sale is an option. Else, permission should be needed to ensure shares are not sold to competition or people you do not want to work with.

Buyback:
Again works after a certain stage of maturity of the company. We do not have this defined, but I will be more than happy to facilitate this when we are there.

Holding period:
Only reason we do not have an infinite holding period is this makes calculation of outstanding options difficult and also sometimes tracking of people (who have left years ago) and getting them to exercise can get painful!

Available for Freelancers / Contractors:
Sometimes you would like to engage with high quality talent (who are not open to full time employment), by ensuring your stock plan can reward such people is very important. Why?
a) You will not be afford this talent otherwise
b) Such talent will usually also want to own stocks.

Cash out vs stocks:
Stock rewards are delayed monetary gratification. Yes it also means you are an ‘owner’ but this ownership value will invariably be very small.

What matters finally is how much money can you make from that paper you hold. Based on this we have an option to directly pay cash to people (for the stocks they hold) or actually get them to own stocks. This works well especially for people who have left your organization and saves you on lot of paperwork otherwise needed for ‘shareholders’

Founder makes a promise but does not do the paperwork

There are many situations where the paperwork genuinely gets delayed (or forgotten by the founder).
– You are more focused on executing and surviving
– Paying lawyers and getting this documented is not on your mind
– You promise ‘x %’ to employees (with promise to do paperwork later)

– Then one day some outside investment happens or there is an exit event. There is no paperwork in place!
– The ‘x%’ promise is at best on email or usually as a conversation between the founder and the employee.

What should a founder do in such a situation?
Simple answer: Always honor your word. Apart from karma which will one day come to bite you, you also need to remember that as a founder the biggest credibility you have is your integrity.

Personal experience of how we handled this in TastyKhana:

This was my first startup and I had no clue how ESOPs work. As mentioned above I promised early employees stocks and never bothered to do the paperwork. (In hindsight, a very bad example)

Long story short, at our exit event we had no ESOPs in place and only promises that we had made.

Sheldon & I paid money (from our share sale) personally & also ensured we adjusted for the tax loss they had (from a share sale vs direct income)

I personally know many founders (with much celebrated exits) who have played foul on promises and pushed this to board, investors etc. But it is simply greed getting better of them.

A standard 30day notice period for all

One of my pet peeves has been the ridiculous notice periods that some companies in India have. A regular software engineer can have a 3months notice period! I mean how can any (small/medium) business plan a resource to join 3 months later!? And I am not even discussing the other issues such as no shows, multiple offers etc.

Hiring policies now at Markk:

  • We will NOT hire anybody who has more than a 30 day notice period at their current job. We will simply not interview/shortlist such candidates.
  • Logical next step is, internally we will NOT have a notice period greater than 30days for any staff (even senior staff)

Notice period is a waste of time:

  • By and large notice periods are a waste of time for both the employer and the employee.
  • The so called knowledge transfer and handover should ideally be part of your regular process of managing a team member.
  • If you document all work done and set processes from day 1, there is no need for long notice periods.
  • I mean if Instagram founders could move out in 15days (a standard in USA), I am sure we all can plan better!

We want to move to 15 day notice period for all:

  • Ideally, like we have in our USA operations, we would like to have a 15 day hiring and handover period for all, but given the nature of other industries and their practices, unfortunately we cannot do this as of today.
  • But what we shall do is if an employee requests early departure & if everything is in order we will let go with all papers and also pay the entire notice period amount in their settlement.

Next goal: Pay the full and final settlement dues BEFORE last date of the employee

  • Another one of our favorites is make our employees follow up and wait for their dues!
  • Again I don’t see why this is needed & internally teams can very well do all leaves, reimbursements, dues etc calculations in the notice period itself.
  • In this FY we will have this setup to ensure you get paid before your last day with us. Read more on our payment policies

Can we in the startup community join hands to build this as a mutual benefit to the entire ecosystem?

Other founders who are doing this or ready to adopt this approach?

Paying on time & a 15day pay cycle

Holding money to your creditors is something we (in India) take pride in! We have a parallel industry in recovery agents, bill discounting, cash collectors etc

So many startups and businesses die, simply because they cannot enforce a payment that was legally due to them. This mindset to not pay on time is a vicious cycle that impacts everybody in the system & has a huge impact on cost of doing business.

Profitable on paper, but struggle to meet expenses each month.

We at Markk want to change the status quo & this is how we make it better for employees & vendors to work with us.

Paying people on time:

For employees:

In May last year, when we begun operation in USA, we realized that it is a standard practice in California (and entire country) to pay people every 2 weeks.

People have money more frequently and hence spending remains kind of constant all month long. There is also a better sense of security* among staff.

A simple but useful practice, which I wonder, why is not the norm in India.

We introduced the same for our team in India and I think it works perfectly! We as founders are on our toes knowing that we need to meet this obligation every 15 days (hence be more prudent on cash flow). Similarly the team now gets paid every 2 weeks & hence have better cash flow all month long!

Some hiccups that we had to adapt:

  • TDS payments on salary – You pay only once a month to IT. Hence we adjusted tax equally over both the pay cycles but pay IT in the following month.
  • Installments worry – Some members were worried that their monthly installments are due on week 1 of each month & what if they end up spending more before that! (some automatic financial prudence kicked in!)
  • Pay slips – Do you issue one or 2 pay slips 🙂 ? One: Other companies, banks etc still recognize a monthly payslip!

For vendors:

All payments will be cleared within 21days from date of billing, subject to some exceptions. We would like to bring this down further to 10days.

I take pride in the fact that in last 13yrs of doing business in India, we have NOT defaulted even once with any vendor. Every bill that was raised to us (across my 3 startups) was settled. If we didn’t have the money we either didn’t commit or requested time with interest if any, but never went back on payment commitment made.

Things we will take up next:

  • Doing the full & final settlement of payment for employees who leave our services BEFORE their last date.

Any other ideas / suggestions / best practices that you follow & think we can implement to help improve the eco-system?

*In California, as per the law, you need to declare bankruptcy if you cannot meet payroll.

Work from home rules – No rules

We at Markk started working from home from March 16, 2020 and India officially went under lockdown from March 24th.

Initially we were not sure how we set the tone for co-ordination among teams and to manage an all remote team. But we decided to keep it simple. Here is how we have been working for last 40days

  1. Have 2 daily 15/20mins checks in with entire team. Morning and evening.
  2. Goals for the week are planned as per current sprint
  3. We dont ask teams to be online during fixed hours. They can connect what works for them.
  4. No phone calls or email follow ups asking for instant responses.
  5. If you need something urgently call the other person.
  6. Slack responses need not be instant (we saw many startups set rules that people need to reply within x mins)
  7. You may be cooking, walking your dog, taking an afternoon nap, spending time with family etc…work at hours that suit you. Delivery of planned work is all that matters.
32 Working from Home Tips You Can Do Right Now (Updated)
32 Working from Home Tips You Can Do Right Now

For me, the biggest distraction has been the non-stop webinar requests that have been setup. Have personally cut back on almost all video calls, and I am back to regular phone calls and only when needed.

Many people think that WFH is easy and more relaxing, but I feel this can easily get overwhelming if you dont plan your day well. The lockdown is mentally taxing with family, home, kids, work etc to be managed every single day with no ‘breaks/vacations’ on weekends.

As a founder or a startup employee the only thing that should matter to you is execution, a webinar or advice won’t help you much here.

For for small startups (<30ppl), dont over complicate. Trust your team & give them the freedom to execute.