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Stock Option Plans

Joseph Gwozdz's Profile

My Company is looking at potentially making some changes to our current stock option plan.  I am interested in hearing from others who have gone through changes in stock option plans as their company progressed from start-up to early or mid-stage.  We are looking at the the award levels for different levels of employees, CXOs, vs VPs vs directors vs other staff.  We are also looking at the amount of initial grant awards vs annual performance awards.  Any advice you can pass along would be appreciated. 

Answers

Topic Expert
Phyllis Proffer
Title: Owner, Investor Relations Counselor
Company: The Heights Company, LLC
(Owner, Investor Relations Counselor, The Heights Company, LLC) |

I’m not an expert, but would like to offer a few items for your consideration. I have a more external perspective from working with the financial community and institutional investors.

Extending stock options to more levels of the organization should be considered in combination with other compensation. The companies for which I have worked usually use bonuses for short-term incentives and stock options for long-term incentives. A consideration would be to tie level for stock options with the bonus plan.

All employees can benefit from the appreciation of your stock through a 401-k plan. Do you have a 401-k plan?

From a shareholder perspective, you don’t want it to appear that you are re-pricing options. It is wise to seek a review of the draft of the proposal with organizations that offer opinions for proxy voting to institutional investors prior to distributing the new option plan for shareholder review and approval.

Other considerations:

Do you have a share buy back plan in place to offset the impact of the exercise of stock options?

You will also want to consider the impact your extended stock option plan has on earnings?

It seems as though a number of companies are using restricted stock rather than stock options at the officer level. I received restricted stock rather than stock options at my last two companies; however, I don’t know the level of the organization in which it wasn’t offered.

Achaessa James
Title: Product Manager
Company: National Center for Employee Ownership
(Product Manager, National Center for Employee Ownership) |

Hi, Joseph. It sounds like you're looking for input for a growing company that has evolving equity compensation needs. Congratulations!

The most important thing to establish before you make any changes is what you want to accomplish via the changes. Are the contemplated awards for attraction of new hires, incentives to current staff, retention of expert staff in a competitive marketplace, motivational based on achievement of performance goals, give the company more flexibility as it moves toward a liquidity event, all of the above? There is much more to equity compensation than just stock options and some types of awards are better suited to certain desired outcomes.

Once you have an understanding of your intended use, then you would be wise to get some unbiased expert advice. I suggest you start with the book "The Decision-Maker's Guide to Equity Compensation," published by the National Center for Employee Ownership (www . NCEO . org). (Disclaimer, I have recently joined the NCEO as their Project Director for equity compensation issues.) After you've done a bit of self-education, then you will be able to talk more comfortably with any experts you choose to consult.

Making material changes to an existing plan can create more problems than it solves - especially on the administration end - and, worst case, may result in a modification to existing grants which could have adverse accounting consequences.

In my practice, I have more often seen that companies do not make changes to existing plans but, rather, create an entirely new plan that meets their changed needs. In this way the existing grants remain under the old plan and any new grants can be issued under the new plan(s). A common example is one in which a company has an existing broad-based "plain vanilla" plan and then later adds a plan only for executives or board members, or adds a plan that is only for performance awards.

I hope this has been helpful for you. Good luck with growing your company and shepherding it through its evolution.

Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

There is some intersting information on the Radford site: http://www.radford.com/home/ccg/valuation_details.asp. I would strongly consider using a 3rd party benchmarking firm to find out what competitive equity comp is for companies of your size, geography, industry, etc. They can be helpful in all sorts of ways with comparative data, legal insights, accounting impacts and more. I have worked with Radford (been a few years) and they were good. I have also worked with other, less expensive firms (it's killing me but the name of the one i liked is not coming to mind right now - sorry) which were good for finding inexpensive comparative data.

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