The role of Employee Stock Option Plans (ESOPs) incentives in the performance of startups

Abstract

This thesis investigates the impact of Employee Stock Option Plans (ESOPs) on the financial performance of startups, with a particular focus on Belgian firms. Grounded on agency theory and a contingency perspective, the study explores how sectoral context and timing influence the effectiveness of ESOPs. Using a panel dataset of 551 Belgian startups between 2012 and 2023, it employs both Two-Way Fixed Effects (TWFE) models and the Callaway and Sant’Anna (2021) Difference-in-Differences estimator to account for staggered ESOP adoption. The results reveal mixed effects. In the short term, ESOP adoption is associated with declines in financial performance, particularly in non-tech sectors. However, in tech startups, significant positive relationships emerge around five years after implementation, suggesting that ESOPs serve more as long-term strategic incentives than immediate performance enhancers. These findings highlight the complexity of ESOP dynamics in early-stage, high-risk environments. The study does not capture firm-level motivations or the strategic intent driving ESOP adoption, which may partly explain the heterogeneity observed in outcomes. Nonetheless, it provides practical insights for founders and investors, emphasizing the importance of timing and sectoral alignment when designing equity-based incentives. The analysis acknowledges limitations, including constraints related to sample size, sectoral heterogeneity, and potential violations of the parallel trend’s assumption. To deepen understanding of ESOP effectiveness, future research should incorporate qualitative methods and cross-country comparisons that shed light on the underlying behavioral mechanisms and motivational factors.