One of the most valuable assets to a company is its people. But to get the best people, you must provide incentives to attract and keep them. A popular way to retain talent is providing stock options. Solid stock options give companies the ability to motivate and reward employees. The following are some major factors to consider when dealing with stock options.
How Do Stock Options Work?
Say Company Acne hires John M. and gives him the option to have 30,000 shares of the company at .25 per share. The option is based on a 3-year vesting with a one year cliff vesting. This means that John M. must stay with Company Acne for at least a year before he can exercise 10,000 of the options. Then he vests the other 20,000 options over the next 2 years. If John M. leaves Company Acne or is fired, he doesn’t get any of the options. Once the shares are vested, he can buy 30,000 shares for .25 cents for a low price of $7,500.
Here are some things to consider before adopting a Stock Option Plan:
Total Number of Shares: Your stock option plan must have a maximum number of shares under the plan. This number is decided by the board, and average between 5% and 20% of the company stock.
Number of Options Given to an Employee: This number is negotiable. Remember that what is most important here is what the number represents as a percentage of the diluted number of outstanding shares.
Consideration: This determines how the exercise price is to be paid. Consideration can include cash, promissory note, deferred payment, or stock.
Vesting: How do options vest?
Usually there is a vesting schedule.
Exercise Price: How much will the employee have to pay for stock once exercised? How long does the employee have the right to exercise the option?
Transferability Restrictions: Are there any restrictions to the transfer of the option?
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