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ARTICLES
Business Week Enterprise "Enterprise Advice & Columns" November 5, 1998 Ask Enterprise by Karen Klein The Art of Giving Stock Options at a Startup How and to whom you give away pieces of your company are strategic decisions Q: I am a program director and co-founder of an Internet applications development startup. Both my partner and I have built this business while retaining our full-time jobs. As we add new people, they will not work for the promise of an empire -- they will need either cash or equity. But we find that sharing equity is scary. We have invested our time and money, and made some risks to start this enterprise. Are other so-called "partners" entitled to the same share of the company as we are? Do you have any recommendations? --A.K. Westfield, N.J. A: Before you start giving away pieces of your business, think of other incentives that you can offer that will make your company an attractive place to work. People in the computer field typically place high value on interesting, innovative, and creative work. Give your employees cutting-edge jobs as well as credit, gratitude, and regular recognition when they do good work. These are forms of compensation that employees do not find at every place of business.Lifestyle accommodation is another drawing card that you may be able to offer. Not everyone wants to work six or seven days a week, though willingness to work long hours are becoming a more common expectation in the workforce. You may be able to attract good employees if you are willing to offer part-time or flex-time schedules or a day-care arrangement. That said, be aware that you are working in a hot arena where there is a shortage of talented employees. You probably are not going to get away with paying much less than what is competitive. When you think about offering equity in your company, hold it out as a long-term incentive for people who are going to stay with your business as it expands. The promise of equity that vests over time can act as "golden handcuffs," giving employees motivation to improve the company (and the eventual value of their shares) and an incentive to stick around to realize their options. But remember, if you don't have plans to take your company public, the value of equity may be questionable, since it won't necessarily be easy to cash out. Put yourself in your employee's shoes -- would you accept a job for what you are offering? Peter Cowen, of Peter Cowen & Associates, a strategic planning and investment banking company in Westwood, Calif., advises entrepreneurs to use an experienced attorney to help structure equity-sharing options. "Whether you issue founder's stock or set up an ISO [incentive stock option] plan, an attorney experienced in setting up stock option programs can help you avoid the legal minefields and tax issues that will come back to haunt you if you're not careful," Cowen says. Make sure you discuss what happens when employees die, retire, quit, are fired, or perform poorly. You will also need to determine what voting rights -- if any -- employees get once they exercise their options. In addition, Cowen recommends that you find an experienced entrepreneur to act as an adviser, helping you determine which employees will get stock options, how much stock to initially give away, and when the stock will vest. "I've seen companies give away too much up front when they didn't need to," he says. "You want to give away just enough to make it worth somebody's while to work with you." An adviser can also help you decide how to value your company and your employees, and help you persuade people that the equity you issue today will have tremendous upside potential a few years down the road. "Equity sharing is a phenomenally valuable tool that has been the engine that has powered startups nationwide, notably in Silicon Valley," says Cowen. "It's a model that is now being emulated worldwide." |
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