Using Stock Options to Build Your Team

As the economy continues to strengthen in 2015, demand for skilled employees continues to grow as well. Companies who are looking to hire top talent have to find creative ways to land (and retain) workers. This is especially true for young companies who are competing against larger, more established businesses who have deeper pockets to attract new hires.

Offering stock options can be a great way to build your employee base. Bill Harris, the founder of Personal Capital, said at a South by Southwest Interactive session in 2013 that stock options are the most powerful way to help build a successful business.

“The people you want to attract to your business are the people who want equity,” he says, according to Forbes. “You need people who are willing to take risks. And then you need to reward them.” For that, Harris says stock options are the “best little storehouse in Texas.”

“It’s great for the company since it’s got no cash outlay,” he explains. “For the employee, it’s even better. They benefit from the stock price rising and are protected from its dips.”

Harris says first-timers often struggle with equity because they don’t understand how to get the maximum value out of it. He suggests a one-year waiting period for new employees after which the stock options can vest monthly or annually. There are no hard and fast rules on who gets how many options, but he suggests executives or early hires can receive as much as 1-2% of the total shares of the company.

Harris also notes stock options can provide a benefit that no future investor could ever receive. “In startups, employees are often able to purchase exercisable shares by as big a discount of as much as 10 to 1,” he says. “In other words, if the preferred stock is a dollar, the common share and employee could be 10 cents.” When those shares start to gain value, the profits could be huge.

When done correctly, equity offerings can help spur employees to bet on an unproven or new company, reward long-term value creation, spur creative thinking by employees, and encourage employees to think about the company’s success beyond their own positions.

Andy Rachleff designed the Wealthfront Equity Plan to help companies figure out how to offer equity. Each year, he says, the company creates a pool that addresses four needs: New Hires (used to hire new employees at market levels), Promotion (used to reward employees that have been promoted), Outstanding Performance (used to reward the top 10% to 20% of employees who were exemplary in the past year), and Evergreen (used for all employees, starts at an employees 2½-year anniversary and continues every year thereafter).

The key, he says, is consistent, early evergreen grants. These grants, he says, are the most common area where tech startups fail to invest until it is far too late in their development.

“The average tenure for most technology employees is two to three years, and waiting until your first employees hit year four is just too late,” he says.

A transparent and consistent system of evergreen grants allows employees to build that system into their long-term expectations and links long-term tenure and contribution to their ownership stake.

Ultimately, finding a compensation package that allows you to attract and retain top talent is key in growing your business. Next time you are planning to hire, consider stock options as a part of your offer!

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