Is Your Employee Stock Plan Old and Out of Touch?
Updated: Feb 15, 2022
Over the last century or so, almost everything about the way we do business has changed, with few exceptions. Technology has given us efficiency other generations couldn’t even dream of, with the notable exception of employee equity and stock plans. Despite the ubiquitous nature of employee equity in startup compensation plans, tech companies go about getting stock secured in an inefficient and expensive way, unchanged from the days of old.
Stock options are expensive for both the employer and employees.
Why, in a world where nearly every business process can be administered with a few clicks, do we still need to call up a lawyer and drop tens of thousands of dollars on antiquated paper documents, outlining a stock option plan that no layperson can understand?
Worse yet, after receiving a stack of legalese an inch thick, team members have to hire their own lawyer to interpret what it all means — and then pay tens of thousands of dollars in taxes for the right to buy it, in addition to the cost of later buying the company stock itself. All this years before they know if the equity will ever be worth anything in the long run.
Starting and running your employee equity plan through traditional lawyers makes no sense when the technology exists to fill this gap.
Let’s not forget the goal: to motivate employees
It's not easy to imagine a system more demotivating than employee stock option plans — especially to the very people who need them to feel the most lit up and inspired about generating long-term results for the company.
It’s not motivating to work long, intense hours for years at a startup, only to get a massive tax bill when your shares vest (but can’t yet be sold). Employees often don’t understand that they still need to buy the shares after vesting or when leaving the company. This can have disastrous impacts on employee morale if they didn’t know ahead of time. Since employees see stock options as part of their compensation package, it’s counter-intuitive to most that they would need to purchase them at all. And they aren’t wrong. Stock options are classified as remuneration by both economists and regulators.
As a founder, we design companies and systems that set us on the path of success. To that end, it’s essential to keep an eye on what employee stock is incentivizing. The stock options vest over time. So honestly what is being incentivized is the length of employment, not the effort or impact of the employee. It’s watching the clock, across 48 months of work. Not inspiring!
The Bottom Line
Teams need tools to join together and feel inspired and motivated to collaborate on building out the future.
One thing is clear: Stock options do not accomplish this task. And the time and expense it currently takes to institute stock option plans only adds insult to injury.
Employee Stock Plans are crucial to a startups' success, as well as to a small business owner’s succession plan. Getting them right will save you money and set your employees (and your company) on a path set for success.
Here are some criteria for successful Employee Stock Plans:
Equity vehicles that protect the employee.
There are much better ways to offer equity than stock options. Restricted Stock Units or Restricted Stock are better for the company and better for the employee.
Take the time to discuss the stock implications with your employee
If you allow yourself the time upfront to fully educate your employees with everything they might want to know about the equity package you are offering, you will avoid misunderstandings and disappointments later on.
Choose Equity Plan Administration that is easy to access
You don’t want the maintenance of your Employee Equity Plan to be a burden, or involve expensive ongoing discourse with attorneys. Choose an equity plan administrator that offers web access and a full web archive of your executed employee contracts.
Stay up to date on location-specific regulations for remote workers
There’s something the SEC calls Blue Sky Laws. It refers to the regulatory conditions that change state by state. If you have remote employees, you might need to hire a lawyer in each country they are from. Upstock and a precious few other innovators offer legal document generation that considers these laws.
For information on Upstock’s stock option alternative that is taking the startup world by storm, check out our product.