Equity or Stock Options
Equity or Stock Options are financial incentives that give employees the right, but not the obligation, to purchase shares of the company at a predetermined price, known as the exercise or strike price, within a specific timeframe. This form of compensation is designed to align employees' interests with the long-term success of the company.
Goal
The primary goal of offering equity or stock options is to incentivise employees to contribute to the company's growth and success, as their potential reward is directly tied to the company's performance in the market.
Context
Similar to how we want to avoid incentivising individual goals with our bonus structures, we want to avoid incentivising short-term thinking with our equity or stock options.
Inputs
| Artifact | Description |
|---|---|
| Company Valuation | An assessment of the company's current market value to set the strike price of options. |
| Employee Performance Data | Evaluations of employee contributions and performance to determine eligibility and allocation of options. |
| Legal and Regulatory Compliance Documents | Documentation ensuring that the equity or stock options program adheres to local and international financial regulations and standards. |
Outputs
| Artifact | Description | Benefits |
|---|---|---|
| Equity Grants | Formal notifications to employees about the grant of stock options or equity. | Aligns employees’ rewards with company success, motivates long-term commitment. |
| Vesting Schedules | Documents outlining the timeline for when options can be exercised or shares are awarded. | Ensures employees remain with the company long enough to contribute significantly to its success. |
Anti-patterns
- Lack of Transparency: Not clearly explaining the terms, conditions, and potential value of equity or stock options can lead to misunderstandings and diminish their perceived value.
- Neglecting Legal Compliance: Overlooking the legal and regulatory aspects of equity compensation can lead to financial penalties and damage to the company’s reputation.