In previous posts, we provided an overview of stock options and discussed different types of employee stock options. During the Internet boom, many technology companies offered stock options to draw in talented employees even without big paychecks by offering a percentage of the wealth that the company would create. This allowed startup companies to hold on to what precious little cash they had and use it for other operating expenses. In many cases, those stock options became worthless when the companies failed, leaving young executives with little or nothing.
Today, stock options are not typically used in place of, but rather in conjunction with, a competitive salary. Stock options can still be a great way to lure in strong talent, but in most cases, it should be used as a perk rather than as the main form of compensation.
The most obvious advantage of offering stock options is that they incentivize employees. Offering stock means that the employee can directly benefit from the success of the company. The more valuable the company becomes, the more value the employee has in the stock options, which creates an incentive for the employee to ensure the company’s continued success. Furthermore, as employees exercise their stock options, they typically become more dedicated to the company’s success as they are more invested in the company and its results.
Other advantages of stock options include:
- Attracting and retaining top talent;
- Giving employees the feeling of being “connected” to the company with an ownership stake;
- Providing employees with a reason to stay with the company long-term;
- Allowing a small company to remain a competitive employer in comparison to other, larger companies by providing comparable benefit programs.
When preparing an employee stock option plan, it is imperative that the plan is properly crafted to account for tax issues and change in control situations.
Employee stock options are an important and advantageous part of compensation for directors, officers and key employees of growing companies. The attorneys at Horwitz, Cron & Armstrong have worked with many companies at various lifecycle stages to provide appropriate stock option plans for their employees. Contact Larry Horwitz at firstname.lastname@example.org to discuss the proper stock option plan for your company.