By Ritika Khetawat
Founder, MissionBridge | Ex–Goldman Sachs, Ex–Morgan Stanley
Employee Stock Option Plans (ESOPs) sound like a win-win. Founders can attract and retain talent without immediately increasing payroll costs, while employees gain a stake in the upside they are helping to build.
But in practice, ESOPs remain one of the most misunderstood instruments in the startup ecosystem — and the confusion runs in both directions. Founders often make structural decisions based on flawed assumptions, while employees accept option grants without fully understanding what they are actually receiving. By the time those misunderstandings surface, the damage to trust, cap table planning, and future fundraising can already be significant.
Here’s what both sides consistently get wrong.
Highlights
The Strike Price Is Not a Minor Detail
One of the common founder mistakes is not putting enough thought into setting the strike price right.
Set the strike price too high, and the retention value of the option pool weakens almost immediately. Employees do the maths. If the gap between the strike price and any realistic future exit value appears marginal, the option grant becomes more symbolic than motivating.
The opposite mistake can be just as problematic. Artificially low strike prices may look attractive in the short term, but they can trigger regulatory scrutiny and raise questions from investors about how the company is valuing itself. A strike price needs to be defensible — grounded in a credible valuation methodology rather than calibrated to support a convenient narrative.
“Last Round Valuation” Is Not Your ESOP Valuation
This remains one of the biggest misconceptions in early-stage ESOP design.
Many founders anchor ESOP pricing to the share price from their latest fundraising round. The problem is that investor pricing reflects the value of preferred shares — instruments that come with liquidation preferences, anti-dilution protections, and rights that common shareholders do not have.
ESOP holders receive common shares, which sit lower in the capital structure and carry fewer protections.
A 2020 research study by Stanford Business School faculty examining 135 US unicorns found that reported post-money valuations averaged 48% above the fair value of common stock.
In practical terms, common shares are often worth materially less than preferred shares. Using preferred share pricing to frame employee equity can overstate the value employees are actually receiving, create unrealistic expectations, and expose companies to legal and governance risks if the methodology later comes under scrutiny.
A credible ESOP valuation requires its own process, including appropriate discounts that reflect where common equity sits within the capital structure.
The Tax Conversation Founders Often Avoid
In many Southeast Asian markets, employees are taxed at the point of exercise rather than at the point of sale.
That means employees may face an immediate tax liability based on the spread between the strike price and the current fair market value — even if they have not yet realised any cash proceeds from the shares themselves.
Many employees are unaware of this dynamic until much later in the process. In some cases, founders themselves may not fully appreciate the implications either. So employees reach what should be a moment of validation — years of vesting, finally cashed in — only to be blindsided by a tax bill they never anticipated.
Founders who walk employees through the full picture — tax treatment, exercise costs, realistic liquidity timelines — build far more durable trust than those who lead with the headline grant number and leave the rest unsaid.
Southeast Asia’s Valuation Gap
In the United States, the 409A valuation framework gives founders, employees, and investors a relatively standardised reference point for ESOP pricing. The methodology is standardised, the process is well understood, and there’s a clear legal safe harbour for companies that follow it.
Southeast Asia has no equivalent. Valuation standards vary by market, regulatory guidance is inconsistent, and there’s no single framework that defines what a “defensible” ESOP valuation looks like across the region. This creates real risk for founders building cap tables and granting options without a clear methodology — not out of bad faith, but because the infrastructure for getting it right is simply less developed.
The absence of a regional standard doesn’t reduce the stakes. Investors, employees considering whether to exercise, and auditors will all apply scrutiny to your methodology. Founders who work with advisors who understand the regional landscape — and can construct and document a defensible approach — are building on much firmer ground.
The Pool Refresh Conversation Usually Happens Too Late
Many startups only revisit their ESOP pool when a funding round, hiring plan, or investor term sheet forces the issue.
By that stage, founders often have far less leverage over the timing and structure of the conversation.
According to ACV Capital, startups across the Asia Pacific typically allocate around 10–12% of equity to ESOP pools, compared to roughly 13–20% globally. That leaves many regional startups with less room to scale hiring before needing to revisit dilution and pool expansion.
A more proactive approach to ESOP refresh planning — tied to hiring milestones, future fundraising plans, and expected growth priorities over the next 18 to 24 months — gives founders more flexibility and control over dilution management.
It also sends an important signal to investors. Founders who enter fundraising discussions with a well-considered ESOP strategy demonstrate stronger capital discipline and a clearer understanding of long-term organisational planning.
Valuation Discipline Is Also Fundraising Discipline
How a company structures and values its ESOP pool ultimately reflects how management thinks about governance, dilution, and long-term value creation.
Investors notice that.
Founders who approach ESOP valuation with the same rigour they apply to fundraising preparation and financial planning often create advantages that extend well beyond compliance. A clear and well-documented methodology signals that the company understands its capital structure and is building governance practices that can scale with growth.
Conversely, inconsistent or poorly explained ESOP structures can create avoidable friction during due diligence — particularly at Series A and beyond, when investors begin scrutinising governance frameworks more closely.
Getting ESOP valuation right is not just a legal or HR exercise — it is a strategic discipline that reduces risk across hiring, retention, governance, and fundraising.
At Missionbridge, we work with founders across Southeast Asia to build ESOP structures and valuation frameworks that are defensible, strategically aligned, and designed to support long-term growth.
Highlights
Read the Chinese article here.
