5 Reasons to Avoid Stock Option plans

Employee stock option plans can be valuable tools for employee retention and attraction, but for small businesses the pain usually outweighs the benefits.

Here are 5 reasons why.

1. There is no one to sell the shares to. It’s not as if one can just sell them on a stock exchange. The value of shares of most small businesses is difficult to determine and more difficult to obtain. There is really only value when someone wants to buy or there is a liquidity event – such as VC funding or an acquisition.
2. Shareholders have rights to information (including financial statements) and rights to vote in some circumstances. A shareholder agreement is a necessity.
3. Stock option plans have complex tax issues for both the company and the employees with the options.
4. Getting the plan right, getting the tax issues right, and keeping control over the fate of the shares is not trivial. The legal and accounting costs to set it up can be significant.  It takes managerial time to deal with the plan.
5. If you want to incent employees, it’s much easier to implement a profit sharing or bonus plan. That can often get the same results, and it doesn’t bring along the legal, cost and time baggage of an option plan.

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