The Pitfalls Of a Stock Option Pool

AdobeStock_431953977-300x169A stock option pool has become an increasingly popular tool for startup companies. Entrepreneurs seeking to attract talented employees will often offer incentives that give employees motivation to make the company as profitable as possible, and equity compensation is a very popular option. There are different ways to offer these equity options to employees, and stock options pools are a popular choice. A pool allows a company to set aside a given portion of company stock to be issued to employees as stock options. While this is a convenient structure for many businesses, it is not always the best option. Learn more about the pitfalls of using a stock option pool – and the other options that might be better for your business.

The Difference Between Stock Options and Restricted Stock

Both stock options and restricted stock are forms of equity compensation made to employees. There are different restrictions that come with each form of compensation, and it is important for companies to understand these effects before making the choice of how to offer equity compensation. Restricted stock creates a role more similar to a traditional stockholder, and the employee may vote and receive dividends. Employers may also reserve the right to buy back restricted stock (or at least have the right of first refusal) in order to maintain control of the company. Stock options are more limited. Employees are usually limited to the right to buy company stock at a set price in the future. This right can create a windfall if company stock exceeds the set price, but it does not give the employee voting or dividend rights. Because there are no voting rights and no set number of shares, employers generally do not retain the right to buy back stock options. Both restricted stock and stock options can be subject to vesting requirements in order to encourage long-term employment.

What This Means For Employers

Employers who use stock option pools do not always have control over how many employees will exercise their stock options – and how much this will dilute the value of founding members’ shares. The company is also not able to protect this value by “clawing back” shares through buyback rights. It is important for employers to understand these risks before creating an employee stock option pool. There are many different options for creating equity compensation, and it is important to find the one that is best suited to your company’s particular needs.

Experienced California Corporate Lawyers For All Stock Matters

There are many ways to create comprehensive compensation packages for employees. The experienced Silicon Valley securities lawyers at Structure Law Group have helped many business owners structure equity compensation packages that both benefit their employees and meet the company’s needs. Call (408) 441-7500 to schedule a consultation with one of the experienced California business lawyers at Structure Law Group or contact us online. The sooner you implement effective compensation packages, the better able your company will be to recruit talented employees who will stay with the company for years to come.