Employee Stock Options
When trying to hire new employees, a piece of equity in the business can be a very enticing offer. The amount of stock that is offered to new employees needs to be taken into consideration beforehand, as the equity you give away can affect the value of your company. As a part of your business plan, you can establish an equity compensation package that will chart a course that is best for your business, future investment rounds, the shareholders, and employees.
Stock options are a good place to start when building a compensation package. They do not carry accounting costs and don’t require cash outlay. Additionally, the difference between the stock price and exercise price is a tax deduction, so this is an added benefit to your business. However, according to the National Bureau of Economic Research, this view does not reflect the true economic cost of stock options. Before deciding how many employees will be given what amount of stock options, make sure you understand the long-term costs of stock options and how they will affect the value of your company over time.
Total Percentage of Employee Stock Options
When you issue stock options you give away ownership of that portion of your business. As a result, while the initial cost of issuing options may appear minimal, there may be significant long-term costs. It’s possible that you’ll lose seats on the Board of Directors or voting power in shareholder elections, which could lead to the loss of certain management privileges.
Business owners may aim to keep their firms under their control by restricting the equity they distribute. For example, 20% of the company’s overall shares could be reserved for employee equity pay, thus limiting the amount of control that may be handed away through stock options is thus limited. An experienced business attorney can help to come up with additional safeguards to protect the control of the business.