There are many tools that founders can use when growing their startup. One of the most important is the ability to provide shares. These represent an ownership stake in the company. As the company grows in value, so does the share. This creates a lucrative incentive for employees to deliver exceptional results and boost the company’s value. Let’s take a closer look at how you can leverage a stock option plan to grow your business.
What Is A Stock Option Plan?
A stock option plan is one of the best ways to make sure that your early employees are rewarded for the time and effort they put into building the business. The stock options can be used in the future to purchase equity in the company for an agreed-upon price. This price is usually lower than the expected market price, giving a discount to stock option holders. However, it’s important to note that stock options don’t create the obligation to buy.
But this approach isn’t without risk. If the company gets sold or shut down before shares are issued, the options become worthless.
There are two reasons why a company might choose to issue stock options. First, they will incentivize employees to work hard. Stock options can also help you attract top-tier talent. Plus, once you have employees, stock options give them a reason to stick around. They will want to work with the company long enough to exercise their stock options.
Several types of stock options are available. Incentive Stock Options (ISOs) tend to be used by the top executives. Because of this, they carry a lighter tax burden. On the other hand, a Non-Qualified Stock Option (NQSO) can be used more broadly, applying to all the employees at your organization. It can help to consult with your lawyers and finance department. They’ll be able to talk you through the choices and help you select the right stock option plan template.
Tips To Draft A Stock Option Plan
If you decide you want to draft one of these arrangements, it’s best to use a stock option agreement template. This will make drafting this important document easier. You’ll be provided with a standard boilerplate document. You can then plug in the figures to better suit your company.
Before you put pen to paper, it’s a good idea to extensively talk with your employees. Make sure that everyone is on board with the idea of receiving shares in your company. Discuss the objectives you intend on tying the stock options to and make sure that they are attainable. It’s also a good idea to run your plan through the HR and finance departments. They will make sure that it’s feasible and in the company’s best interest.
When you are ready to start drafting your stock option plan, you’ll need to decide how many shares you are going to give away. When you are calculating this, don’t forget to factor in other equity holders, like investors. You don’t want to dilute your stake too much, as you will risk losing control of the company.
Next, it’s time to set eligibility requirements. This outlines which of your employees will be given share options. You can also specify what they need to do to be able to claim their options. Sometimes, you can tie the options to performance objectives.
Just because you have laid out their obligations in the plan doesn’t mean that everyone will understand it. It can help to use a few real-world examples, so your team knows what they are expected to do. It’s best to have regular meetings to make sure that your employees are on track.
You might also need to include a vesting schedule. This is an incentive to get people to work with your company for longer. A typical example is a four-year vesting schedule at a rate of 25 percent per year. In this case, the employee could cash in their options after one year. But they would only get 25 percent of the shares allocated to them. If they wanted their full share package, they would need to stay with the company for four years.
These agreements contain plenty of legalese. Using a stock option plan template will make setting up the document easier. All the legal frameworks are in place. You just need to customize it to suit your business. However, it’s still a good idea to ask your lawyer to inspect the document before you sign. They will be able to spot any mistakes.
There is another reason why using a stock option agreement startup template makes sense. These documents tend to explain things in plain English, avoiding overly complex jargon. Because of this, you can make sure that everyone understands the agreement.
Conclusion
Giving out stock options is a great way for startups to foster employee loyalty, rewarding your team for the hard work they are putting in. Even better, if you use a stock option agreement template drafting these arrangements is easy. Now that you know how it all works, you just need to decide on a plan that works for your business.
