Privacy, Business and Law

It is a common and accepted practice for cash-starved start-ups to attract talented employees by offering substantial numbers of stock options as an alternative to high salaries and bonuses. However, many company founders, in their haste to attract qualified employees, do not give sufficient thought to the long-term consequences of large stock option grants.

While the options may be worth little at early stages of development, if the company is successful, they may become worth substantial sums. While option grants to entry level of employees and first level management are a great way to provide performance incentives and to promote a team spirit, they can have unintended consequences. Investors will discount the value of companies that have optioned large percentages of equity. In addition, we are beginning to see the first round of wrongful termination lawsuits by low-level employees at companies that have undergone exponential growth, who were terminated for performance reasons before vesting in options that were worthless at the time of the grant, but are now worth millions.

The moral of the story -think carefully about the number of options granted to employees; they should not be seen as an unlimited resource.

by Dan Weisberg “10 Mistakes Technology Companies Make With Employees”