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Stock Option Planning

A Customized Portfolio—A Proven Approach

Employers have several options to make their business more attractive when hiring and retaining staff. There's a lot to choose from, from healthcare and dental plans to bonus schemes and employee discounts. Stock option plans are another popular scheme. However, they can be complicated and difficult to understand.

Below is a list of FAQs about stock option plans to help you navigate and understand them if you are considering starting one within your business.

What Is a Stock Option Plan?

A stock option plan is a form of security-based compensation, typically used to offer stock options for the benefit of employees or other service providers. It is usually used to compensate, retain, and attract employees or compensate directors and other service providers.

How Do I Create a Stock Option Plan?

The first step in creating a stock option plan is to develop your philosophy. This should be a collaborative process between CEOs, stockholders, and employees and should include how to communicate the incentive to future employees. A significant factor in designing your stock option should be your company's mission and values.

Next, decide how much of your company's stock you wish to share with your present and future employees. Additionally, stock option plans should outline the balance between equity compensation and cash.

The final step is to implement the plan. At this stage, follow-through is critical. Put the plan in writing and request approval from stockholders and the board. You should also consult with specialized lawyers to ensure that the plan complies with all state and federal regulations. Each state has its own regulations around stock option plans. If employees live in different states, this can complicate matters further, and you should definitely consult lawyers to ensure the correct sets of regulations are being followed.

Do I Need a Stock Option Plan?

Stock options are a great motivator for employees as part of an overall employment package, but there is no law or regulation saying you must have one. However, you should look into whether one is appropriate for your type of business and the sector in which you operate.

Which Is Better: RSU or Stock Options?

The answer to this depends on the size of your company. Companies generally stop offering stock options plans and begin introducing restricted stock units (RSU) as they become larger. There are several reasons for this:

  • The value of RSUs is easier to understand for employees
  • The cost of exercising options becomes a significant burden for employees
  • The company wants to limit dilution

When the economic climate is not good, it can make sense for companies to offer RSUs instead of stock options as RSUs will retain some value even if the stock price goes down — unlike stock options. However, if the company's value drops significantly for a short time and then rises, stock options appear better in comparison to RSUs.

Overall, the answer is that both have their pros and cons; you should consult a specialist to work out the best plan for your company.

How Does an Employee Stock Option Plan Work?

Stock Option Plans are, in basic terms, a promise by a company to purchase shares in the future at a predetermined price. Essentially, your company grants employees stock options with an exercise price (the pre-set price offered to employees at the time of the grant) that reflects the stock's fair market value at that point in time. Employees will have the ability to buy the stock at that exercise price at some future point when, in theory, shares should appreciate in value.

For example, if you grant 100 shares of options with an exercise price of $2 per share, and the shares appreciate to $5 per share by the time you are fully vested, an employee will be able to buy the 100 shares for $200 when they are currently worth $500. As a result, they will have gained $300 worth of value in the form of shares.

Starting Your Stock Option Plan

Starting Your Stock Option Plan

The process of creating a stock option plan for your business is not a straightforward one, particularly if your business is a large one with many employees. Click here to navigate this process with professionals who can give you the best possible advice.

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