An Employee Stock Option Plan (ESOP) is a bucket of shares of a company’s common stock (and a set of rules that governs their distribution) reserved for distribution to new hires. The establishment of an ESOP is a popular method to incentivize and reward employees. Startups often use ESOPs to attract and retain top talent when they may not be able to offer competitive salaries or benefits.

ESOPs in startup companies typically pre-approve certain vesting schedules, which outline the timeframe over which employees become eligible to exercise their options and/or fully own stock that they purchased via restricted stock purchase agreements. This incentivizes employees to stay with the company for a certain period, aligning their interests with the long-term success of the startup.