CEO's Notebook: Stock Options
We're thinking of offering stock options. Any tips?
Make sure employees understand what they're getting into. When a number of employees at BroadBand Technologies, in Research Triangle Park, N.C., exercised their stock options, they did so without realizing that they had to immediately pay taxes even though they didn't get any cash from the transaction. (See " Know Your Options" for an explanation of how and when such tax liabilities can occur.) "We helped them out with loans," says chairman of the board Salim Bhatia.
Now the publicly traded telecommunications-equipment company, which had $23 million in 1996 sales, educates workers about stock options.
Corey Rosen, executive director at the National Center for Employee Ownership, in Oakland, Calif., suggests reminding employees that a stock-option grant rarely replaces more traditional benefits such as a pension plan and therefore should be viewed as a bonus--one that in some cases may never be worth a dime.
"It really depends on whether or not the company is profitable or, in particular, if the company goes public or is acquired," says Cynthia Clarke, a partner with Boston-based law firm Sullivan & Worcester LLP.
Be careful about what you say. "A company can't be in the position of giving tax advice to employees," says Steve Burt, an audit partner in the Austin office of the accounting firm Coopers & Lybrand LLP.
He recommends that you encourage workers to seek outside counsel and that you never talk an employee out of exercising options or selling stock. If you do, an employee might have grounds for a lawsuit if, say, the company goes out of business before that employee exercises those options or sells the shares. Though Clarke thinks the chances of such a suit are slim, she advises that "you'd be wise to look out for what you're saying whenever you're talking to someone about buying or selling stock."
Make the link to performance as clear as possible. At BroadBand Technologies, Bhatia didn't want hotshot techies--many of whom have come to expect stock options--to take the company's options for granted. So BroadBand's options are awarded in return for meeting annual corporate goals. If the company meets yearly targets, employees are reviewed and are granted options for both their team and their individual performance.
"It's important that it doesn't become an entitlement," says Bhatia. "You have to communicate to people on an ongoing basis how their role affects the company." --Stephanie Gruner
In general, are there marketing advantages in sharing equity?
There can be. Ewing and Thomas, a 45-person physical-therapy business in New Port Richey, Fla., opted for an employee stock ownership plan in 1988 to simplify succession planning. The company plays up being 100% employee-owned on every piece of advertising--from appointment cards to a banner on the front of its building. Patients walk into the company's offices asking, "What does that mean?" according to vice-president Dee Thomas. "Of course, that gives us a wonderful opportunity to talk about what makes us different." Infinity Graphics, a $20-million printing company in Enfield, Conn., reports a similar marketing boon from employee ownership. "The ESOP is a tiebreaker," claims chief operating officer Clint Humphrey. "It pushes us over when someone is thinking of trying new suppliers." --Susan Greco
Where can I get more information about equity compensation?
Don't know the difference between an employee stock ownership plan and a stock-option plan? You're not alone. Confusion abounds about the ways that companies can offer equity to workers. You can increase your knowledge by visiting the Web sites of the National Center for Employee Ownership (NCEO), in Oakland, Calif., and the Foundation for Enterprise Development, in La Jolla, Calif. In the stock-option section of the NCEO site, you'll find an essay explaining the differences between an ESOP and options, "A Tale of Twin Acronyms: An Employee Stock Option Plan Is Not an ESOP." Both groups also offer helpful publications. NCEO, for example, publishes The Stock Options Book, edited by Scott S. Rodrick (510-272-9461; 1997; $25 for NCEO members, $35 for nonmembers). Good luck deciphering the chapter on valuing options, but the sections on private companies and on phantom stock should have plenty of appeal.
The Foundation for Enterprise Development produces the Owner's Toolbox on Equity Incentives (619-459-4662, $189), which includes The Entrepreneur's Guide to Equity Compensation, two CD-ROMs on the subject, and sample plan documents. The 73-page Entrepreneur's Guide gives a user-friendly overview of everything from stock bonuses to ESOPs. --Martha E. Mangelsdorf
Worried that employees may use the value of their stakes in your company to start their own businesses? Mark Zweig, founder of privately held Zweig White & Associates, a $4.2-million publishing and consulting company in Natick, Mass., addresses that problem through the buyback provision in the company's shareholders' agreement.
"If there's no sanction involved in selling their stock, you create an incentive for someone to leave," says Zweig. To get the full value of their stock, employees who leave the company voluntarily have to wait two years before joining or starting a competing business. "It's reasonable and enforceable," says Zweig. "No one has to buy stock. We just want the gain to go to the people who are going to stay." --Christopher Caggiano
Off the Record
What entrepreneurs are telling Inc. about employee ownership
"I like to think people hang out here because they like me, but they're here to make money. As long as the stock is going up, they love it here." --CEO, $185-million transportation company in Texas
"My prejudice is that ownership is a more powerful motivator than money. It's more a question of keeping people involved. Here people can choose money or stock. Only one employee ever took the money." --CEO, $13-million manufacturer in Kentucky
"Having stock options has helped individuals think more like owners than like employees. We've seen a shift in how decisions are made as a result. Like purchasing and staffing decisions. Employees with options no longer simply suggest, 'Spend more money or hire more people.' They're thinking of other solutions." --Founder, $23-million health-care-administration company in Illinois
Help! Our employees don't seem to appreciate the stock we grant.
Stock ownership can be a powerful motivational tool at private companies--but only if you educate employees. At the privately held ad agency Colle & McVoy, the orientation for new employees includes a session with the chief financial officer and the chairman. The two explain balance-sheet basics to the new hires--and make it clear how the company's performance affects the price of stock in the company's employee stock ownership plan. Last year Minneapolis-based Colle & McVoy had billings of $122 million and was named ESOP Company of the Year. --Susan Greco
Can you become a public company without realizing it?
Say, for example, you have a fast-growing company and a broad-based stock-option plan. "If a certain number of employees exercise their options, the company becomes a de facto public company, subject to securities laws," says Corey Rosen of the National Center for Employee Ownership. --Stephanie Gruner
FOCUS ON STOCK OPTIONS
- Motherhood, Apple Pie, and Stock Options by Edward O. Welles
Do stock options threaten the very companies that offer them?
- Stock Options and Equity
Using stock and stock options to your company's advantage
- Compensation: Know Your Options by Jill Andresky Fraser
In a private company, there's more than one way to structure a stock-option plan