Stock options can be a powerful tool within your business. Providing this opportunity to your employees is a great way to attract the best and brightest in your industry, and to keep them around. Employees with stock options are more likely to think about the long term implications of their actions, and work hard as part of the group to make the company successful. And they’re a great way to share future wealth without costing the business much of anything in the short term. However, it isn’t always a cut and dry benefit. It’s a complex transaction, and one that can get messy and difficult if not well organized. Here are five things to consider before offering employees stock options.
First of all, how long will you require an employee to stay with the company before providing this option? If the answer is six months or less, you might want to rethink your plan. Hiring is a tricky business, and in many ways it is a gamble. You’re hoping that your new hire is the right person for the job and that he or she fits well within the team and is dependable. But you won’t always know the answer right away. If you offer stock options right out of the gate, you are taking on the expense of legal and accounting professionals required to handle it, without being sure the employee is in for the long haul. It could end up a waste of time and resources.
Are you and your employee aware of the realities of the offer? Not all shares in a company are valued equally, and those that come on board first will always make out better with their stock options. It all depends on how much financing your company has to pay back, as well as whether you expect to sell the business or not. In either case it is a perk, but just be sure your employee has realistic expectations. If they make a decision based on some future dream of riches that’s not in the cards, that will reflect back on both of you.
Do you have a clear and easy to understand set of stock plan rules? Any employee that takes on stock options will do so with the idea that they’ll stick around until those options mature. But this doesn’t always work out. Sometimes people need to move on. They may find a new job opportunity that they cannot pass up. Perhaps their family wants to move, or they’re simply ready to retire. Whatever the circumstance, stock options are treated in a certain way each time. You’ve got to have the rules laid out and should be ready to deliver them to each employee for review. Otherwise you could face legal trouble down the road.
Actually, the first question you may want to ask is if any of this business is worth the time and energy to you? There are lots of ways to add incentives for employees that are far less complicated. Exceptional medical insurance policies and 401(k) plans with matching fund contributions are both hugely appreciated. And neither one of them involve you giving up pieces of your company. Those stock options represent a share of your business, and they aren’t to be given out lightly. Consider all of the implications of this strategy before you begin.
Finally, do you know how to value your company? Not all entrepreneurs are savvy at this part of the game, and it takes more than spending a weekend checking out some trading academy stock trading courses to get it right. You should have a corporate attorney and a business accountant involved in the organization of the option plan. Even if you feel you know what you are doing you probably shouldn’t handle it yourself. The last thing you want is to discover that you gave too much of your business for too little, when it’s too late to do anything about it.