The Startup Law Guide
Once your business starts to take off, it’s natural to want to share your success with the people who have helped and supported you along the way. One popular way to do this is through the issuance of stock options.
Offering equity to your employees can benefit your business in a number of ways. But while the decision to issue stock options may be easy, determining how much to issue can be a much more complicated question. It’s important to devise an overall strategy and determine your long-term goals before adopting any stock option plan.
Why Issue Stock Options?
Stock options are a great way for startups with limited capital to reward their loyal employees without having to lay out a lot of cash. In fact, they can help raise capital for the company when employees pay to exercise their options.
It’s not just about company finances, though. Stock options are also helpful in ensuring the quality of your workforce. Stock option plans can help attract and retain stellar employees, as well as motivate your current team to work even harder to make sure the business remains successful. While stock options won’t always make employees millionaires, stories of such successes at companies like Facebook have made their issuance a powerful tool for inspiring hard work and company loyalty.
How Many Shares Should You Issue?
The key to any stock option plan is maintaining flexibility in your ability to issue shares. Before you decide how many shares to issue to each employee, you first need to determine the maximum number of shares that can be issued overall.
A stock option plan must set aside a specific number of shares. The size of this option pool will vary for each company. While there’s no set rule, most experts will tell you that option pools typically make up somewhere between 5% and 20% of the company’s total stock. Remember, the pool just represents how many shared can be issued. How many you ultimately issue is up to you.
Once you’ve established your option pool, you need to decide how many shares to grant to any given employee. Again, there’s no magic formula that provides the answer. Many companies choose to designate a specific number of shares for a particular job position. While the option will be for a defined number of shares, the important thing to keep in mind is the percentage of the company that number represents. You likely want to offer a director a greater percentage of ownership than an entry-level employee. Ultimately, this is a mathematical exercise that depends on how many employees your company has at each level.
If the whole process seems like trial and error to you, you’re not alone. Companies often struggle with the question of stock options, and consider multiple plans before deciding on the one that works best. Consulting an advisor experienced with stock option plans can help take some guesswork out of the process.
Legal Guidance in Building Your Business
At The Gouchev Law Firm in New York, we work with businesses of all sizes, including start-ups and franchise businesses. Call us at (212) 537-9209 or schedule a free strategy session today to see what The Gouchev Law Firm can do for your business.
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