Stock Options
A leader in the FT of 21 June on the cash flow impact of options. The title Will reform pull the plug on technology profits? (requires subscription) might give you a hint as to the writers initial leanings.
The net transfer of wealth diagrams at the bottom of the page are instructive. The article suggests that the furore over options is a back lash against the expose of how much value is being transferred from owners to employees. Over-stated I would imagine. A buy-side analyst worth his pay packet will already have factored in the dilutive/cash-flow impact of stock options. The greater issue is their ability to align interests all the time, not just when things are going well. Not being particularly well versed in motivations in large companies, my comments will be limited to start-ups (though they are inherently the same for people who value their work rather than their ability to climb the corporate ladder.)
When do start-up founders / employees worry about stock options?
a. When things are going well
b. The day they join
c. Every new financing round
When do start-up founders / employees worry about cash remuneration?
The rest of the time.
In particular stock options have almost no impact on employee behaviour when life gets difficult (sweat equity yes, options no.) As the article points out there is a growing feeling that options are a poor way to incentivize employees.
Not that I am trying to do away with options altogether. Better a stock option than cash, especially when the cash is limited. But lets not pretend that a talented sales guy is tied to the company (aligns his interest with yours) through stock options. Not being seen to fail is a better incentive.
Which leads to the follow on question. With what do you replace stock options? Maybe like democracy they are the worst system we have; except for all the others.
22 June 2004
Stock Options
A leader in the FT of 21 June on the cash flow impact of options. The title Will reform pull the plug on technology profits? (requires subscription) might give you a hint as to the writers initial leanings.
The net transfer of wealth diagrams at the bottom of the page are instructive. The article suggests that the furore over options is a back lash against the expose of how much value is being transferred from owners to employees. Over-stated I would imagine. A buy-side analyst worth his pay packet will already have factored in the dilutive/cash-flow impact of stock options. The greater issue is their ability to align interests all the time, not just when things are going well. Not being particularly well versed in motivations in large companies, my comments will be limited to start-ups (though they are inherently the same for people who value their work rather than their ability to climb the corporate ladder.)
When do start-up founders / employees worry about stock options?
a. When things are going well
b. The day they join
c. Every new financing round
When do start-up founders / employees worry about cash remuneration?
The rest of the time.
In particular stock options have almost no impact on employee behaviour when life gets difficult (sweat equity yes, options no.) As the article points out there is a growing feeling that options are a poor way to incentivize employees.
Not that I am trying to do away with options altogether. Better a stock option than cash, especially when the cash is limited. But lets not pretend that a talented sales guy is tied to the company (aligns his interest with yours) through stock options. Not being seen to fail is a better incentive.
Which leads to the follow on question. With what do you replace stock options? Maybe like democracy they are the worst system we have; except for all the others.
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