Incentives and Employee Share Plans (ESOP)

1. Components of the compensation package

• Base salary: must be sufficient for a decent life. Equity doesn't pay rent.
• Benefits: insurance and statutory obligations.
• Variable bonus: tied to a measurable outcome, and simple enough that the employee can calculate it themselves.
• Equity: a share in long-term value.

The balance follows the stage: an early company offsets a lower salary with a larger share; as it matures the balance inverts.

2. Pool size

A pool of company shares is typically set aside for the incentive plan and expanded as needed. Its size is determined by the hiring plan: the number and seniority of roles targeted over the coming period.

An important negotiating point: in funding rounds, investors sometimes require the pool be created or expanded before the investment enters — meaning existing shareholders bear the dilution alone. Calculate that effect explicitly during negotiation; detail in Investment Terms.

3. Vesting

The common formula: four years with a one-year cliff before anything vests, then periodic vesting thereafter.

Elements requiring written resolution:
- Accelerated vesting on a sale — full or partial, and on what conditions.
- The exercise window after departure — a short window can effectively mean the employee loses their entitlement if they can't fund the exercise.
- Treatment on termination for cause, with "cause" defined precisely.

4. Explain what you're granting

What most destroys the value of a plan is granting a stake the recipient doesn't understand. Explain in writing and clearly:

• The number of shares and the percentage of total shares on a fully diluted basis — a percentage is clearer than a bare number.
• The exercise price where applicable and what it means.
• The vesting schedule with specific dates.
• That the percentage will dilute with every subsequent round, and that this is normal rather than a breach.
• That value is realised only at a liquidity event — not before.
• The potential tax implications on conversion or sale, with a recommendation to consult a specialist.

Candour here is an investment. An employee who understood what they received values it; one surprised years later feels deceived — and tells others.

5. Structural requirements

The plan needs a legal form that can accommodate it: the ability to issue and allocate shares and manage different classes. A form dividing capital into shares and permitting multiple classes is better suited — see Choosing a Legal Structure.

It also needs: a written plan document, the required governance approvals, a cap table updated after every grant, and a review of the zakat and tax impact with a specialist.

6. Design mistakes

• A verbal promise of equity with no documentation. A source of later disputes, and it surfaces in due diligence as an undocumented commitment.
• Grants without vesting.
• Granting too late, after the pool is depleted, so later joiners are excluded.
• No uniform policy, so grants are individually negotiated and disparities emerge that are hard to justify.
• Overpromising future value — unrealistic projections guarantee disappointment.
• Failing to explain dilution, so it is later interpreted as a breach.

Checklist

• A sufficient base salary before discussing equity
• Pool size derived from the hiring plan
• Dilution effect calculated before funding rounds
• A written, approved plan document
• Vesting with a cliff
• Acceleration on sale and post-departure exercise window settled
• A written explanation to each recipient covering percentage, schedule, and dilution
• A legal form capable of issuing shares
• Cap table updated after every grant
• Tax impact reviewed with a specialist

FAQ

Should I grant equity to all employees?
A philosophical choice. Broad grants strengthen belonging and complicate administration; narrow grants are simpler with less motivational effect.

What if an employee leaves before vesting?
They forfeit the unvested portion under the plan document — which is why the document is written clearly before granting, not after.

Should I grant equity to advisors?
Possible, in very small amounts tied to a time commitment and defined deliverables.