As a general rule, entrepreneurs and business-owners are extremely protective of the equity that exists in their ventures. As they look to launch their venture and consolidate any initial success, this can force them to become preoccupied with maintaining 100% of their equity at all costs.
While there is nothing fundamentally wrong with this, it can become counter-productive and something of a false economy in instances where your employees and partners lack the motivation to share in your vision. As an aspiring leader, you must understand the importance of motivating human assets and in some instances this may require you to give away equity in the form of stock options.
How to Successfully Offer Employee Stock Options: 3 Key Considerations
While there may be sound logic that supports this as a motivational measure, however, it is crucial that you offer stock options without compromising your own sense of security or the viability of your own shares.
This process may be even more challenging in instances where you have already sacrificed some of your equity to external investors, so here are three considerations that will help you to manage the process: –
Set Aside Between 10% and 20% of Your Equity for Senior Stakeholders
Of course, some of the biggest employers in the world offer stock options to their staff members, although none of them do so without first calculating precisely how much of their equity that can afford to give away.
As a general rule, you should aim to set aside between 10% and 20% of your company’s equity for key stakeholders, creating a fixed stock value that is distributed across your selected range of beneficiaries. How you distribute this is entirely up to you, whether you choose to create an even spread of equity or afford more to more experienced employees and executives.
In general terms, however, try to reserve the majority of your stock options for strategic thinkers and operators within the business, while rewarding employees that have had the single biggest impact on profitability.
Set Clear Criteria and Consider the Long-term Retention of Employees
While some may argue that offering stock options reduces annual expenditure, most people leverage this tactic as a way of retaining key staff members and maintaining higher levels of engagement. This can also be a key acquisition metric too, particularly in an age where bottom line salary is increasingly unimportant.
If you are using stock options to engage and retain employees, it is imperative that you set clear criteria for eligibility. Long-term retention and a low turnover of staff is more important in some departments than others, for example, with research and development offering a relevant case in point. You can therefore restrict equity offerings to employees in specific fields, or at least prioritise those that can provide years of invaluable and productive service.
Similarly, you need to ensure that you set clear criteria that dictates individual qualification for stock options. When it comes to long-term engagement, it is important that you only make equity available to employees once they have completed several years service in your company, otherwise you may find yourself giving away stock on a relatively indiscriminate basis or to temporary workers.
Try to Offer a Myriad of Equity and Cash Packages to Employees
On a final note, it is important that you afford employees the freedom of choice, in the form of several options that include a combination of cash and equity. Of course, each option needs to be something that you are comfortable with and able to afford, but the key is to motivate as many employees as possible regardless of their outlook.
In basic terms, this means offering one cash-rich, low equity bonus package and another that is low in cash but high in equity. This enables to achieve a greater balance and drive a more productive workforce across the board, as you continue to target long-term employees with equity-rich bonuses and afford non-strategic workers a wider range of choice.
The key here is to keep things simple, while remembering that such a choice is only available to employees who meet you established criteria for stock options.
Hopefully, these steps will help you to leverage a small amount of your businesses equity to successful motivate key stakeholders and drive long-term retention company-wide.
