Employee stock options are a great way for startup companies to remain competitive in the job market. Startups oftentimes offer salaries that are less competitive but can make up for that in other ways, such as giving away company ownership. Learn about a few of the primary reasons startups should consider offering employee stock options.
What Are Employee Stock Options?
Employee stock options are a benefit that employers offer to executives, employees, and even contractors. Instead of just giving employees stock directly, they give them the option to purchase company stock at a specific price for a set period of time.
Stock options are usually vested on a schedule that the employer chooses. If the options vest on a four-year schedule, as many do, the employee would receive 25% of the shares each year until they earn all of them after four years. Any stock options that aren’t vested are canceled if the employee leaves the company.
Why Stock Options Are a Good Idea for Startups
For all organizations, there are many benefits of stocks. However, employee stock options are often associated with startups as a means of rewarding employees who are hired early in the startup process. In this case, they can reap large rewards if and when the company chooses to go public. Here are a number of reasons why offering employee stock options is a great strategy for employers.
Attract Talented Employees
It often takes more than a paycheck these days to attract talented employees, especially if they’re considering taking a chance and working at a startup company. Employee stock options, though, can balance that risk for employees, as helping get the company off the ground could mean a big payday for employees later if they are able to buy shares at a low cost and sell them for substantial profits later.
![Employee Meeting](https://mindxmaster.s3.amazonaws.com/wp-content/uploads/2020/05/How-to-Boost-Team-Sales-and-Employee-Performance1.jpg)
Retain Employees by Encouraging Ownership Mentality
When employees feel that they are partial owners in a startup, they are more likely to give their work their best effort. By giving employees equity in the company, you can rally the whole team around the success of the company, increasing their loyalty and commitment and encouraging a long-term mindset.
Low Risk for Employees
The benefit of stock options for employees is that there is no downside risk. For example, if employees are given the opportunity to buy company shares at the strike price, the fixed price at which they can buy, of $1 per share, and the price goes up to $12 per share, employees can choose to buy the stock at that time and enjoy the $11 per share profit if they sell. If the strike price is $5, and the value of the shares on the open market drops below that, then employees can simply choose to not exercise, or buy, those shares. In other words, there is no risk and they lose nothing.
It’s important to carefully evaluate whether giving away stock options is a good plan for your startup. They can be complex, and there is a base level of education you may need to provide to help employees understand them. It’s always a good plan to speak with a financial adviser about what percentage of stock you may want to allocate for employees and investors.