Why offer employees equity in your startup? Allocating equity to your employees in the form of or stock option plans, generates two key benefits:
- It encourages your team to form a serious relationship with your startup
- It creates a monetary incentive
Although your startup’s founders should gain the most from holding stock, remember that your first group of employees will help you attract top talent to help you grow your business.
Often, early hires receive great employee equity deals as most startups offer stock options at extreme discounts. As the share value grows over time, employees stand to make strong profits.
Employee stock option plans: Pitfalls to avoid
Routinely, companies rely on common structures for stock option plans and build in little innovation and creativity. This reliance on the status quo inadvertently helps perpetuate some inherent design flaws in plans that can cause employees to feel that the stock options are not as valuable as their employer would like them to believe.
This dissatisfaction can stem from some key issues that reduce the employee’s connection to the company:
- Employees usually do not get enough stock
- Typically, a huge difference exists between the options that founders receive and those that other employees receive (with founders receiving 100 to 200 times more)
- Employees do not feel like an “owner” if they perceive that the stock options have negligible value
- If an employee leaves the company, they often cannot afford to exercise their options (if employees have only 90 days to cash in their vested stock options, they may not have the financial resources to pay for the upfront cost of exercising the stock)
- Vesting periods can be too short. Vesting periods are typically three to five years, which does not provide much time for the employee to make decisions about their options. Stock option plans that allow for 10 years may give the employee more time to consider their investment and the necessary tax planning
- Employees usually do not have enough information about the stock value or how the options work. Many employees see stock option plans as complex, and may not even know what questions to ask. Information should be given freely to each employee to enable them to understand the value of what they are being offered and how this relates to their current situation and the market
Employee stock option plans: No monetary guarantee
Although there are many benefits to buying early stock in a company, a significant increase in the worth of stock is not guaranteed. Educate your employees about this to make sure they are not accidentally misled when assessing their options.
It’s about more than the money
By creating a culture where employees feel that they are part of the team and by communicating regularly about the company’s progress, you can emphasize to your employees that stock options are not just about money. In explaining that the value of holding stock lies not only in the financial gain, you can bring out the ownership behaviours you want at your startup.