If "cash is king," a well-designed stock options plan can truly steal the throne. That’s because offering options can have a more powerful effect on employees than giving them cash bonuses. Namely, it can change the way your employees think about your business — and their role within it.
“A cash bonus is worth what you get that day,” said Sean Condon, wealth advisor at Windgate Wealth Management. “An option is worth what you build the company into with your colleagues. Employees thrive when the business thrives. So they start to think like owners.”
Condon, a Certified Financial Planner, offered six steps to setting up a plan that inspires people to work for your company’s long-term success.
Decide what you’ll give away. Get clear on what you and your investors want to keep for yourselves versus what you’ll give away. It’s a tradeoff.
“If you don’t offer options, you could lose good people to other companies that offer this benefit,” said Condon, who describes options as a way to share a piece (or pieces) of your ownership pie. “It allows you to attract and retain the right team, working to increase the size of the pie rather than just your share of it.”
Determine your distribution plan. Some owners distribute a specific amount of equity to all employees evenly. Others allocate options according to what certain roles are worth in equity. In this scenario, a CTO will receive more than an administrative assistant, although all employees are included.
“An analyst can help you understand the going market rate for each of the various roles you’re considering,” said Condon.
Protect yourself. It’s wise to implement a vesting schedule, offering employees restricted grants when you hire them with 100 percent vesting realized only after a specific milestone, or “cliff.” People can’t exercise the options until they hit that cliff, typically after two or three years of employment.
This shields you from rogue staffers who leave within, say, three months. You don’t want them to pocket a piece of ownership they haven’t earned.
Create a gift that keeps on giving. You could grant employees all their options at one time only, like when they join you. But if people can accumulate more at certain inflection points, like when they get a promotion or achieve something great, they have good reason to work for those distinctions. Many companies also offer “retention grants,” providing more options to those who stay loyal over time.
“It’s incentive to stay with you,” said Condon. “Otherwise, people might be tempted to stay only until they can exercise their options, when they’ll start to think, ‘Ok, I’ve gotten all I can. What’s my next job?’”
Educate your people. It makes no sense to create a plan if your equity holders don’t understand it. Bring in your advisor to explain equity ownership to employees, including what it means to hold options and how and when they can be exercised. To earn still more loyalty among employees, ask your advisor to help people understand how to mitigate any tax implications.
Make it meaningful. Often, owners will explain this benefit in the most boring terms possible: “You own one half of one percent of the company.” That’s certainly accurate, but it’ll have people saying, “So what?” Translate the percentages into what really matters: dollar bills.
Try this: “You now have $50,000 worth of this company.” If you note that nothing is guaranteed, you can also make projections: “If we meet our goal to be 10 times bigger in a decade, you’ll own $500,000 in 10 years.”
And no one would say, “So what?” to that.
Photo via Shutterstock
Windgate Wealth Management helps companies design and implement financial benefits to provide for employees, increase personal wealth and reduce tax liability. Learn more.