What Percentage of Stock Options Should I Give To Different Levels of Employees?

AdobeStock_419006596-300x200Equity compensation is an important tool employers use to attract – and retain – talented employees. Before you begin offering stock options, it is important to consider the amount of stock being issued to employees and how issuing it could affect the value of your business. There are many ways to structure an equity compensation package. Consult with a California startup lawyer to structure compensation packages that are best for your business, your future funding rounds, your shareholders, and your employees.

Before issuing any equity compensation, it is important to understand how this will affect the value of your business. Many businesses consider stock options as an inexpensive part of a compensation package. There is no accounting cost and no cash outlay required, so stock options might seem like an attractive option. There is even an added tax benefit: the difference between the stock price and the exercise price is a tax deduction to the business. But the National Bureau of Economic Research reports that this perception does not form an accurate picture of the actual economic cost of stock options. Understand the long-term costs of stock options – and how they will affect the valuation of your business over its lifetime – before making any decisions about how many employees will be awarded what amount of stock options.

The Total Percentage of Your Employee Stock Options

The percentage of stock options you issue results in a loss of control over that percent of your business. Thus, even though the economic cost of issuing options might seem low, there could be serious long-term costs in other facets of your business ownership. You could lose seats on the Board of Directors or voting power in shareholder votes. You could even lose certain management rights (if, for example, the shareholders or the Board eventually voted to hire managers to take over your duties).

Some business owners try to safeguard the control of their companies by limiting the amount of equity that is issued. There might, for example, be a pool of twenty percent of the company’s overall shares that are designated for employee equity compensation. This limits the amount of control that can be given away through stock options. There are other safeguards that can be enacted, so consult with a business lawyer to find the stock option structure that is best for your business.

Experienced Equity Compensation Attorneys for All California Business Owners

It is more effective to structure employee compensation packages correctly from the start, rather than trying to correct problems and regain control later. The California business attorneys at Structure Law Group can help build your business effectively from the ground up. We help entrepreneurs select the best business entity, management structure, and employee compensation packages for their unique needs. Call (408) 441-7500 to schedule a consultation with one of the experienced California corporate lawyers at Structure Law Group. The sooner you have legal advice, the better protected your business will be.