Good morning, fellow founder! 👋

Welcome to another edition of FounderForge. Your Europe-focused startup digest - just because we do things a little differently here! 🇺🇸 👀

If you missed our last issue, you can still read it at the link below! 👇

Today's topics are all about turning your team into shareholders:

• All about ESOPs in the US (vs. Europe) 🍰

• [SPECIAL] The Ultimate ESOP Template 🚀

📊 Data Dive: Employee Shares (ESOP)

While in the US giving employees shares is the most normal thing in the world, in Europe, we still treat it as something akin to "He-Who-Must-Not-Be-Named". 😱

Today, companies may still be able to get away with it, but as awareness grows, so does pressure from employees.

Soon it will no longer be an option to give shares, but a necessity to get the best people.

With that in mind, let's take a closer look at how ESOP*s work in the US (as opposed to Europe…).

Maybe, just maybe, we will inspire someone to do it right.

And hey, Europe? Can we please stop this virtual shares crap, give real shares and not tax them as income? Thank you. 🙏

Average Size of ESOP Pools

Broadly speaking, ESOP pools range from 10% to 25% at all stages, with the total allocation increasing steadily as the company progresses.

This means that ESOP pools are set up once and then fixed until the end of time, but require more and more shares over time. 🥲

This increase is borne not only by the founders but by all shareholders (yes, even investors need to give shares to incentivize the best ☝️).

In comparison, European employees in later-stage companies own half as much as their US counterparts (around 10% vs. 20%).

Average Allocation First Employees

The earlier you join, the more you get. Sounds and is logical.

As a rule of thumb, the average initial allocation for "ordinary" employees is between 0.2% and 1% for early-stage start-ups.

Experienced executives usually get a bigger slice, around 1% to 2%.

While in the US it is common to give shares to "everyone", in Europe it is much more executive-focused.

Here, two-thirds of the ESOP pool is allocated to executives and one-third to employees below executive level. In the US, it's the other way around. 🙃

Employee Churn and Vesting

Shares usually come with a 1-year cliff and a 4-year vesting period - meaning it takes 4 years to get all the shares.

So, for example, if you get 100 shares, you end up with 0 if you leave in the first year, and only 50% / 50 if you leave after two years.

While the vesting period is something that nobody thinks about when they join, the reality is that most people never receive their full allocation of shares.

And about 1/4 don't even make it over the cliff. 🤷

But hey, this is a good thing - more shares available for the true believers! 🚀

A Guide for Europe

Index Ventures, one of THE leading VC funds, has published an amazing handbook on how to approach ESOP as a European founder.

Take a look below! 👇

Here is to better ventures and better ESOPs! 🥂

_{*ESOP, VSOP, (Virtual) Employee Stock Ownership Plan, (Virtual) Employee Stock Option Plan, fugazi, blah, blah - ultimately ESOP = share plan for employees.}

🛠 Founder's Toolkit: The Ultimate ESOP Template

Setting up and monitoring an ESOP (VSOP) today can still be quite a challenge.

There are a lot of screws that need to be turned in order to have a fully fledged ESOP plan.

From allocating the initial pool, deciding how much gets to whom, setting and tracking vesting schedules... the list goes on and on. 🫣

No wonder big companies are embracing ESOP plans (and equity in general).

Carta (the company from which most of the data in today's Data Dive comes), which also offers ESOP plans, recently raised $1.1B at a valuation of $7.4B. 🤯

A really good European solution is Ledgy!

But don't worry - you don't have to spend a fortune to get started. FounderForge has created the perfect template for you - and is giving it away for FREE! 🙌

Check it out below! 👇

🔗 Founder's Library: Curated Resources

A collection of random reads that the FounderForge team enjoyed.

• How to Make the Hardest Pitch Deck Slide Good: Competition by Paddy Stobbs

• VC Returns Are at a 10+ Year Low by Marina Temkin (Pitchbook)

• Why LTV:CAC Is a Misleading Measure of Performance by Jay Po (Interesting take…)

• How to Measure Which Marketing Activities Actually Drive Revenue by Emily Kramer & Kathleen Estreich (MKT1 Newsletter)

We also started reading a new book about what makes billion-dollar startup founders different from the rest: Super Founders

😂 Meme of the Fortnight

It feels great to look at my Excel spreadsheet and see the value of my shares... until I open my bank account. 🫠

🤔 Your Thoughts on Today's Edition

• 🔥 It was great!

• 😒 Meh - it was okay.

• 👎 Not interesting to me.

That's all for now!

If you find this newsletter valuable, share it with a friend!

Cheers,
The Founders Blacksmith 👋

Issue #5 | 02. November 2023