But for start-ups, giving employees options is likely to be a huge trap.
First, founders should pay attention to the option trap.
1. Salary can motivate employees more than options.
Entrepreneurship needs to take risks, so the founders are willing to sacrifice their low income for the time being in exchange for possible future development prospects. However, most ordinary employees have no willingness or ability to take risks. As far as I know, for most employees of start-ups, although they work in start-ups, their mentality is still "work" rather than starting a business. Since it is a job, for employees, the actual cash income is the main driving force for his work. Therefore, "low salary+option" is not a suitable incentive method for employees. For ordinary employees, the best way to motivate them to work hard is to pay employees at least equal to or higher than the salary in the human resources market.
In fact, from the perspective of the history of option as an incentive method, option is also a supplement to salary, not a substitute for salary. When the enterprise still can't satisfy the key employees when the wages paid to the employees have been enough, the enterprise has to take out some shares and add a heavy weight to the wages.
2. It is not cost-effective to issue options when the company's prospects are uncertain.
Option is actually a kind of salary and welfare: employees can sell their own shares and get good cash income when exercising in the future. If the company's performance is good and the valuation/market value is high, the income from selling shares will be higher. The higher the company's valuation/market value, the happier employees will be when they get options. If the company does not have a clear or relatively objective valuation, employees will not feel the value of options. In this case, employees have to pay attention to the number of options aimlessly. As a result, when start-ups issue options, there will often be such a situation: no matter how many options are given to employees, employees are dissatisfied and think they should get more options; But once the company's performance and valuation are done and the equity is valuable, the founder will feel that the initial option was given too much, but it is too late to go back on our word.
Therefore, it is necessary to issue options to employees when they are valuable. If the option is valuable, even a little option can make employees happy and motivated. For example, after the A round of financing, or after the products are basically verified by the market, we will start to consider issuing some options. This is because with financing and products, employees can believe that the future of the enterprise is relatively clear. Moreover, with financing and products, the company's valuation will be relatively clear, and employees will know how much the option can be worth and have a bottom in their hearts.
3. Employees who have no direct contribution to the company do not need to issue options.
Many start-up companies still have the knot of "full shareholding", thinking that this can mobilize everyone's enthusiasm, do a good job in company performance and push up company valuation. However, this is often not the case. Not every employee will work harder because he chooses the option.
The work of some employees will have a direct impact on the company's performance. If he works harder, the options in his hand will be more valuable. He may be more willing to work hard for the appreciation of options, such as the person in charge of product development, sales or customer service. For this kind of employees, option incentive is meaningful.
Some employees' work, no matter how hard or how little they work, may not have a direct impact on the company's performance. In this case, he will take a more "hitchhiking" attitude, expecting others to work hard and improve the company's performance, such as ordinary business personnel and administrative personnel. For this kind of employees, reasonable KPI assessment and bonus are more practical incentives.
Second, the option trap that employees of start-up enterprises should pay attention to
1. It is useless for companies with uncertain prospects to take options.
The company is yellow and the option is equal to zero. Options are equal to future shares, but shares are not necessarily equal to actual income. There are only two ways to realize shares: first, the company makes good profits and pays dividends to shareholders according to the proportion of shares; Second, transfer and sell the shares and get the money paid by the seller.
If the company has no profits or even losses, there will be no dividends. Companies don't go public, they don't buy shares, and there is nothing wrong with shares that can't sell at a price. So, if you work in a company whose future you think is uncertain, it may not be long before the company goes bankrupt and business can't go on. No dividend, no merger, no listing, no matter how many options can be turned into a penny. When you are hired by a startup company with equity as a condition, you might as well calculate how far this company may go. If you have no confidence in it, try to get a reasonable salary first.
2. The option of verbal commitment is meaningless.
Options are not stocks, but rights in contracts. After signing the option contracts, at a certain point in the contract, employees have the right to buy the shares in the number agreed in the contract at the price agreed in the contract. It can be seen that time, price and number of shares are the core elements of options, and these elements need to be written in the contract.
If there is no contract, the number of shares promised is just empty talk, and this option cannot be realized at all. Typical option documents generally include option plan, option agreement, exercise notice template, etc. , usually a complete plan made by a professional organization for the company. When the company promises options, employees had better ask for clarification of these situations.
If you don't plan to work in the company for four or five years, don't take the option.
The main purpose of the company to issue options to employees is to stick to employees. When you sign the option agreement, you get the option, not the shares right away. In order to stick to employees, companies usually convert employees' options into shares in batches. For example, they need to work for a period of time or complete a certain performance before they can convert some options into stocks. This is also called exercise and exercise. Therefore, employees usually have to work continuously for many years before the options in their hands can become shares. Traditionally, it takes more than 4 years for employees to invest all options. If an employee leaves his job halfway, he will probably get nothing. If you continue to work in a company for four or five years, you may get a lot, but in this rapidly changing world, you may also lose many opportunities. So think carefully before you choose. Are you really willing to work in this company for that long?
Third, start-ups and employees carefully bypass the option trap
If options are a trap for start-ups and employees, how to avoid them carefully?
1. Salary is the best incentive.
For start-ups, salary is the best incentive, which can save a few shares. Using salary instead of equity/option to motivate employees can help enterprises raise funds in the future, introduce more senior talents, leave enough equity space, and protect the founder's control over the company and personal interests as much as possible.
For start-up employees, salary is the most realistic return. Paying wages regularly can solve the most urgent needs of employees. Your own labor and work efficiency can be directly reflected in next month's salary, and it is also the best respect for employees.
2. If an enterprise has no money, it can owe wages first.
Most start-ups are not unaware of the value of equity, but also understand that issuing equity and options should be cautious. However, it is precisely because the enterprise has no money in the initial stage that it considers issuing options and equity. I hope to use equity to make up for the low salary of employees. As I said before, whether equity can make money is uncertain and far away. It is better to pay high salaries to employees, pay them first, and cash them as soon as the company has financing or revenue. Such a promise will not be realized until at least a few months or a year later.
Start-ups can set a goal with employees, for example, financing in place within 3 months or generating income within 6 months. Once the financing is in place, or the company has revenue, it will give employees a higher bonus to make up for the previous low salary.
3. Bonus or option? Employees choose for themselves.
As I said before, employees should be paid as much as possible in the initial stage of starting a business, instead of hastily issuing shares and options. If you can't afford it, you can owe it first and then reissue the bonus after financing and revenue. Even if options and shares are issued, it is best to issue options and shares after financing, product verification and income. The company is valuable and the shares are valuable.
So can these methods be combined?
For example, give employees a lower salary first, promise that the company will raise funds and make profits, and then give employees a high bonus.
When the company raises funds and has income, employees can receive bonuses directly.
Employees can also choose not to receive bonuses, but to obtain certain equity and options according to the value of the company at this time.
At this time, the company's equity is valuable, and employees are more willing and more affordable under the incentive of equity. For the founder, at this time, it is only necessary to sacrifice a little equity to achieve the purpose of motivating employees.
Du Guodong, paying attention to the equity and investment of start-ups, WeChat official account "Du Guodong" (ID:duguodongo)