Granting stock options to key employees

Employee Stock Option (ESO) Definition

 

granting stock options to key employees

The following shows how stock options are granted and exercised: ABC, Inc., hires employee John Smith. As part of his employment package, ABC grants John options to acquire 40, shares of ABC’s common stock at 25 cents per share (the fair market value of a share of ABC common stock at the time of grant). The Wealthfront Equity Plan is designed to specifically handle the four most important cases for granting equity to employees. Each year, you create a new option pool that addresses the following needs: 1. New Hires: These grants are used to hire new employees at market levels. 2. Start-ups may also grant stock options to employees who take the risk to work with the company at an early stage with the hope of large payouts once the company goes public or is purchased. If your company is considering granting stock options to your employees, below are some best practices and considerations to keep in mind prior to rolling out an employee stock option plan. The Basics of Stock Option .


Stock Option Compensation Accounting | Double Entry Bookkeeping


Prior to Wealthfront, Rachleff co-founded and was general partner of Benchmark Capital. He also teaches courses on technology entrepreneurship at Stanford Graduate School of Business. Follow him on Twitter arachleff. Before companies like Fairchild and Hewlett-Packard began the practice fifty years ago, distributing stock options to anyone other than top management was virtually unheard of.

But the engineering tradition that spawned Silicon Valley was much more egalitarian than traditional corporate culture. When implemented properly, granting stock options to key employees, broad employee ownership within a company can: Align the risk and reward of employees betting on an unproven company.

Reward long-term value creation and thinking by employees. Unfortunately, despite decades of experience building new hire option plans, many startups still fail to put in place an equity compensation plan that adequately rewards long term employees over time. When I was a venture capitalist, I noticed companies that seldom lost employees due to recruitment had a lot in common, granting stock options to key employees. Sure they offered challenging and inspiring work environments sought by top-tier talent.

But you might be surprised to learn they all rewarded outstanding performance through the issuance of additional stock options or as is now the case, RSUs in a similar way. The Wealthfront Equity Plan Based on my observations, I created an equity allocation plan that I encouraged all my portfolios to adopt. It worked so well that executives and my fellow board members usually brought my plan with them when they got involved with other companies. Over the years, I am proud to say that hundreds of companies, including EquinixJuniper Networks and Opswareadopted this plan because it just made sense.

How It Works The Wealthfront Equity Plan is designed to specifically handle the four most important cases for granting equity to employees. Each year, you create a new option pool that addresses the following needs: 1. New Hires: These grants are used to hire new employees at market levels. Promotion: These grants are intended to reward employees who have been promoted, granting stock options to key employees. Promotion grants should bring the recipient up to the level you would hire her at today for her new position.

This pool should be reserved for non-executives. As I said before, cliffs cause people to raise their heads to consider alternatives and should be avoided at all costs. The Key: Granting stock options to key employees, Early Evergreen Grants Most companies put considerable effort into the size of their equity grants for new hires. Fewer companies, especially young ones, put significant effort into thinking about follow-on grants. Evergreen grants are the most common area where technology startups fail to invest time until far too late in their development.

The average tenure for most technology employees is two to three years, and waiting until your first employees hit year four is just too late. Instead of an ad-hoc process, the Wealthfront Equity Plan offers a transparent, consistent and fair program of equity grants that employees can build into their long-term expectations.

As a result, not only do you avoid cliffs, but you also tie both long-term tenure and contribution to granting stock options to key employees ownership stake. The best part is that, as your company grows, you always grant stock in proportion to what is fair today rather than in proportion to their original grant.

What About Dilution? Based on our calculations, the Wealthfront Equity Plan should result in approximately 3. Please see our Slideshare presentation for the details of how to allocate stock for a person private company. The Wealthfront Equity Plan might result in 0. I would take the extra dilution 11 times out of That being said, there are a number of board directors who think that is too much dilution for a company to absorb.

A few months ago, a fellow I recruited as CEO to two of my Benchmark portfolio companies told me he never appreciated the value of the Wealthfront Equity Plan until he joined a board where the board members were too cheap to do the right thing for their employees. Needless to say, he implemented the Wealthfront Equity Plan when he started his own company. Investors and employees make much more money by increasing the size of the pie rather than their share of the pie. The only reason not to implement the Wealthfront Equity Plan is greed, and greed seldom leads to a good outcome.

They encourage employees to think about increasing the value of their options through accomplishment rather than asking for more upon completion of a task. It granting stock options to key employees been my experience that companies granting options for completion of milestones seldom build a culture that values equity — and therefore suffer greater turnover.

A well-designed equity allocation plan works for both the employer and the employees. The Wealthfront Equity Plan creates a tremendous incentive for people to stay at a company without costing the employer too much.

 

The Right Way to Grant Equity to Your Employees | First Round Review

 

granting stock options to key employees

 

Start-ups may also grant stock options to employees who take the risk to work with the company at an early stage with the hope of large payouts once the company goes public or is purchased. If your company is considering granting stock options to your employees, below are some best practices and considerations to keep in mind prior to rolling out an employee stock option plan. The Basics of Stock Option . The Wealthfront Equity Plan is designed to specifically handle the four most important cases for granting equity to employees. Each year, you create a new option pool that addresses the following needs: 1. New Hires: These grants are used to hire new employees at market levels. 2. The granting of stock options is a form of compensation given to key personnel (employees, advisers, other team members etc.) for providing their services. Like any other form of compensation, such as the cash payment of wages and salaries or fees to advisers, it is a cost to the business.