If A Job Offer Comes With Employee Stock Options, Should You Take It?
Usually, when a company is looking for ways to grant incentives for their employees, they’ll turn to the normal, tried and true methods such as bonuses and increments.
However, in an effort to incentivise better performances from the employee, an Employee Share Option Scheme (ESOS) is gaining more and more popularity among companies.
But what is ESOS you ask? We have put together a simple guide to help you make an informed decision.
What is an Employee Share Option Scheme (ESOS)?
The first question that we’re going to answer, is what actually is an ESOS? Well, in the simplest of terms, it’s a scheme that allows your employees to acquire shares in the company that they work for; or as it’s otherwise known, stock options.
So this means that an ESOS is a form of equity compensation that allows employees to have some ownership of the company that they’re working in.
How does an ESOS work?
In an ESOS, you grant your participating employees the right to buy a number of company shares at a predetermined price, which allows them to own shares in the company.
However, before the participating employees get to exercise their right to buy company shares, there are a certain set of conditions that they have to fulfil. These conditions can be anything like a prescribed length of time they must work for the company, or performance-based conditions.
This is important, because it gives the employees higher motivation to stay at the company and perform well in order for them to exercise their rights.
Once they have met these conditions, they can’t wait forever though. ESOS comes with a predetermined amount of time before these share options expire.
Now let’s look at the benefits of ESOS, and how it helps a company retain their employees.
Benefits of an Employee Share Option Scheme
Here are the benefits of an ESOS from the employer viewpoint.
- Opportunity to share company success with employees
With an ESOS, your employees will share and profit from the company’s success as much as you, as their shares will also grow in price if the company grows further and achieves more success. This can lead to higher motivation across the workplace.
- Changing employee’s mindset from an employee to an ownership mentality
When an employee exercises their ESOS rights, the employee now owns a share of the company themselves, which will help drive their motivation up as they now have bigger stakes in the performance of the company.
- Improves employee retention and recruitment
Another big benefit of an ESOS is that it helps your employee retention massively. This is due to the fact that an ESOS is not an immediate payday. Instead, your employee will need to ensure that the company and their performance achieves an acceptable level of success, which will motivate them to stay at the company for a long period of time.
It also helps with recruitment, as the brightest talents will be attracted to stay at a company that provides them with the opportunity to grow with the company. At the same time, they get to share in the company’s success.
- Ability to generate liquidity while still maintaining control
If you’re looking for a way to generate liquidity for your company while still maintaining control over the direction of your company, an ESOS is a great way to go about it. This is due to the fact that you can sell your shares to your employees at a predetermined price, which allows your company to gain liquidity, while still maintaining control over the direction of your company.
Is ESOS worth it for the employees?
So now that we’ve explored just what exactly is an ESOS and its benefits, let’s answer the main question posed in this article; is ESOS really worth it for the employees?
That question can be quite tricky to answer, as it varies from a case-to-case basis. If you’re working at a company that you believe in, and you feel strongly about its potential to grow and be successful, an option to obtain some shares in the company is almost always very welcome.
But, you should also remember that an ESOS can take some time to pay off. So that might be something else that you want to keep in mind.
Here’s what you need to do before jumping to a decision if you are offered employee stock options in your job.
- Estimate and understand the market price of the stock
If you are in an established public-listed company, then you should be able to evaluate its publicly traded stock performance. If you are joining a startup without any track record of share market price, then you need to do more homework to put a potential value to the company’s stock
- Know the type of stock option you are offered
Find out the income tax treatment of the type of stock options you are offered as they are considered a type of employment benefit which are subject to tax. Plan ahead so that you are aware of the amount of money you have to pay in taxes on these stocks based on their category and duration of holding it.
- Stock options impact on your salary negotiation
Some employment renumeration packages may take into consideration the type of stock options you choose, and you may actually be using money from your salary package to purchase it. For example, the price you will be purchasing the stock and the time frame before you can exercise your stock option and the percentage of your stock options you can transact.
- Stock options ownership terms and conditions
Your stock options as an employee may not have the same value as those held by the owners or investment partners of the company. Your percentage of ownership may be diluted further with new rounds of investment funding. This happens if the owners sell parts of their vested shares.
Some stock options come with high exercise price if the employee chose to leave their employment so read the fine print carefully. Consider how long you are prepared to hold the the stock. The time horizon to see the payoff of their stock option may not be visible or too far down the road.
If you work for a private company, your stock options can’t easily be converted into cash unlike benefits like year end bonuses. In fact, until the company goes public or expands in value, those stock options may actually be worthless.
So, if you feel otherwise, then perhaps more traditional methods of benefits and incentives would suit you and your needs better, such as bonuses and yearly increments in pay.