For innovative companies, giving employees stock options seems to have become a standard configuration. More and more founders regard "financing separates people and gathering people" as their principle for building teams and employing people. It is popular among major companies to allocate stock options to employees, which has accordingly raised the psychological expectations of talents in the human resources market for stock options. In addition, the driving role of venture capital is also related. When many venture capital invests in a company, they will require the company to set aside an option pool to issue options to employees. For these reasons, many companies are beginning to prepare to issue stock options to their employees when they are still in the start-up stage, and even issue stock options to employees regardless of their position.

However, for start-up companies, issuing options to employees is likely to be a huge trap.

1. Option traps that founders should pay attention to

1. Salary is more motivating to employees than options

Starting a business requires taking risks, so founders are willing Temporarily sacrifice low income in exchange for possible future development prospects. However, most ordinary employees do not have this willingness or ability to take risks. As far as my preliminary understanding is concerned, for most employees of start-ups, although they work in start-ups, their mentality is still "work" rather than entrepreneurship. Since it is work, for employees, actual cash income is the main motivation for their work. Therefore, "low-wage options" are not a suitable incentive method for employees. For ordinary employees, the best way to motivate them to work well is to at least pay employees a salary that is equivalent to or higher than the human resources market.

In fact, judging from the history of the incentive method of options, options are also a supplement to wages, rather than a substitute for wages. When a company cannot satisfy key employees even though it has already paid enough wages to its employees, the company has to take out part of its shares and add a heavy weight on top of the wages.

2. It is not cost-effective to issue options when the company’s prospects are uncertain

Options are actually a kind of salary benefit: employees hold options, and when they exercise the options in the future, they can sell the shares and get a A nice cash income. The company's performance is good and its valuation/market capitalization is high, the higher the income from selling shares will be. The higher the company's valuation/market capitalization, the happier the employees will be when it issues options to employees. If the company does not have a clear or relatively objective valuation, employees will not feel the value of the options. In this case, employees have no choice but to focus aimlessly on the number of options. As a result, when start-up companies issue options, they often encounter this situation: no matter how many options are issued to employees, the employees feel dissatisfied and feel that they should get more options; but once the company's performance and valuation improve, , the equity is valuable, and the founder will feel that the initial option grant was too much, but it is too late to regret it.

Therefore, options must be issued to employees when they are valuable. If the options are valuable, even a small amount of options can make employees happy and motivated. For example, after the A round of financing, or after the product has been basically verified by the market, you can start to consider issuing some options. This is because with financing and products, employees can be convinced that the company's prospects are relatively bright. Moreover, with financing and products, the company's valuation becomes relatively clear. Employees also know how much the options are worth, and they have the psychological confidence to get the options.

3. Employees who have not directly contributed to the company do not need to be issued options

Many start-up companies still have the idea of ??"all employees holding shares", believing that this can mobilize everyone's enthusiasm and work together to improve the company's performance and Push up company valuations. But the actual situation is often not the case. Not every employee will work more seriously because they have received options.

The work of some employees will have a direct impact on the company's performance. If he works harder, the options in his hands will be more valuable. He may be more willing to work hard for the appreciation of the options, such as The person in charge of product development, sales or customer service. For such employees, option incentives make sense.

For some employees, no matter how hard or how hard they work, it may not have a direct impact on the company's performance. In this case, they will more likely have a "free ride" mentality and hope that Others work well and improve the company's performance, such as general business personnel and those engaged in administrative affairs. For this type of employees, reasonable KPI assessment plus bonuses are more practical incentives.

2. Options traps that start-up employees should pay attention to

1. For companies with uncertain prospects, it is useless to take options

If the company fails, the options equal to zero. Options equal future shares, but shares do not of course equal actual earnings. There are only two ways to realize the shares: one is dividends. The company has made good profits and distributes dividends to shareholders in proportion to their shares; the other is transfer, where the shares are sold and the seller pays the money.

If the company has no profits or even losses, there will be no dividends. If the company is not listed or acquired, no one will buy the shares. Shares that cannot be sold for a price are nothing. Therefore, if you work for a company that you think has an uncertain future, you may not be able to work for long before the company becomes obsolete and cannot continue to operate. There will be no dividends, no mergers and acquisitions, and no listing. No matter how many options you have, it will not become a Every penny. When a start-up recruits you in exchange for equity, you might as well first calculate how far the company is likely to go. If you don’t have much confidence in it, it’s better to try to get a reasonable salary first.

2. Orally promised options are meaningless

Options are not stocks, options are rights in a contract. After signing an option contract, at a certain point in time stipulated in the contract, the employee has the right to purchase the number of shares stipulated in the contract at the price stipulated in the contract. It can be seen from here that time point, price and number of shares are the core elements of options, and these elements need to be written out in the contract.

If there is no contract and it is just an empty promise of the number of shares, this option cannot actually be realized at all. Typical option documents generally include option plans, option agreements, exercise notice templates, etc. It is usually a complete plan developed by a professional agency for the company. When a company offers stock options, it's a good idea for employees to ask to clear up these situations.

3. If you are not prepared to work in the company for four or five years, do not take options

The main purpose of companies issuing options to employees is to stick with employees. Once you sign an option agreement and receive options, you don't immediately get the shares. In order to retain employees, companies usually turn their options into shares in batches. For example, they need to work for a certain period of time or achieve certain performance before a batch of options can be turned into shares. This is also called vesting and exercise. Therefore, in order for the options in the hands of employees to be converted into shares, they usually have to work regularly for many years. According to the usual practice, it usually takes more than 4 years for all options in the hands of employees to be vested. If an employee leaves midway, he or she will probably get nothing. You may gain a lot by continuing to work for a company for four or five years, but in this rapidly changing world, you may also lose a lot of opportunities. So before you take options, you have to think carefully. Do you really intend to work in this company for that long?

3. Start-ups and employees should be careful to avoid option traps

If options are traps for start-ups and employees, how can they be careful to avoid them?

1. Salary is the best incentive

For start-ups, salary is the best incentive, which can save a small amount of equity. Using wages instead of equity/options to motivate employees can leave enough equity space for the company's future financing and introduction of more senior talents, and it can also protect the founder's control over the company and personal interests as much as possible.

For start-up employees, salary is the most realistic reward. The wages received regularly can meet employees’ most urgent living needs. Your own labor efforts and work efficiency can be directly reflected in next month's salary, which is also the best respect for employees.

2. When the company has no money, it can first owe wages

Most start-up companies do not know that equity is valuable, and they also understand that they should be cautious when issuing equity and options. However, it is precisely because the company has no money at the start-up stage that it considers issuing options and equity. It hopes to use equity to make up for the low wages of employees. As mentioned before, whether equity can make money is uncertain and very far away. Instead of motivating employees with equity that will become valuable only after a few years, it is better to promise employees a high salary, pay it back first, and then cash it in as soon as the company has financing or revenue. Such a promise can be realized in at least a few months or a year.

Start-up companies can work with employees to establish a goal, for example, to secure financing within 3 months, or to generate revenue within 6 months. Once financing is in place or the company has revenue, employees will be given a relatively high bonus to make up for the previous low wages.

3. Bonus or option? Employees make their own choices

As mentioned before, employees should be paid as much as possible in the early stages of starting a business, rather than hastily issuing equity or options. If you can't pay your salary, you can pay the debt first, and then pay back the bonus after financing and revenue are generated. Even if options and equity are issued, it is best to issue options and equity only after financing has been obtained, the product has been verified, and revenue has been generated. The company has become valuable and the equity has become valuable.

So, can these methods be combined?

For example, first pay lower wages to employees, and promise that the company will raise funds and generate revenue, and then pay high bonuses to employees.

When the company raises funds and generates revenue, employees can receive bonuses directly.

Employees can also choose not to receive bonuses, but to receive certain equity and options based on the value of the company at this time.

At this time, the company's equity is valuable, and using equity to motivate employees will make them more willing and more affordable. For founders, they only need to sacrifice a little equity at this time to achieve the purpose of motivating employees.

Du Guodong, focuses on entrepreneurial enterprise equity and investment, WeChat public account "Du Guodong" (ID: duguodonggo)