Incentive Stock Options: Equitable Employee Equity

It’s always exciting to hear about startup companies that have made it to their big liquidity event and are living the dream. However, if you listen closely, sometimes you also hear tales of regret about who was — or who wasn’t — on the receiving end of the big payout.

The key to avoiding such regrets is to grant equity mindfully. Stock options are overwhelmingly pervasive and expected in high tech and other innovation economy sectors. If employee equity through a Stock Incentive Plan is part of your startup company’s compensation strategy, consider granting smaller amounts, more frequently. This builds in lots of opportunities for recalibration and course correction. Each set of grants is a fresh opportunity to re-evaluate and identify the key employees that are essential for success.

Some of the old excuses for not doing this — the hassle, the time, the cost — no longer hold water. Automated tools can now handle all the tracking for you, in real time. The requisite paperwork can be generated with the click of a button. Even the reports necessary to establish the fair market value of your stock are easier to get and less expensive than they’ve ever been for early stage companies. You can make decisions about what’s best for your business and your employees without factoring in the time you’ll spend or the many fees you’ll have to pay.

Some companies grant stock options to new employees when they’re hired and that’s pretty much it. Sure, it’s nice to set things up once and not worry about it again. And vesting schedules ensure that the employees who don’t stick around don’t walk out the door with equity. That’s good, but it means you are deciding how much each employee is going to contribute to the company before you’ve worked with them. I’ve seen firsthand just how difficult it can be to tell who is going to have the most impact on your business. There are ideal candidates who look perfect on paper, say all the right things in the interview, but fail to deliver on all that promise. Conversely, the employee who becomes the cornerstone of your team might have failed to dazzle initially in a lackluster interview.

Being methodical about re-evaluating employee option holdings periodically ensures you won’t overlook anyone and that you keep incentives evergreen for key employees. After all, Incentive Stock Options have “Incentive” right in their name. Each additional grant to an employee is an opportunity to re-focus and re-inspire. It sets the stage for a conversation that recognizes contributions and motivates thinking about how to increase the value of those options by making sure the company is successful. After all, a more successful company means the entire pie will be larger, which means everyone’s piece will be bigger.

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