The Power of Stock Options in Startups – challenges and lessons learned

Startups with limited cash but immense potential increase their chances for success by bringing experts into the game. Equity programs can be instrumental in attracting top talent by sending a powerful message to candidates and employees that they have a stake in the company and share the common goal of growing its profitability with co-owners and the whole team.

Equity programs are most effective during the early stages, such as the seed stage and Series A, and remain relevant but less impactful by Series B. At these stages, companies lack the resources for substantial compensation packages, have a critical need for strong employees to establish the company, and have few active employees, making the equity share feel significant. For large public companies, equity programs can still be effective if applied selectively. Stock options are generally a must in the US and increasingly in European tech startups. 

Stock options grant holders the right to buy shares at a set price within a certain period. Plans may differ in parameters such as the allocation pool of equities, target audience for equity compensation, vesting period, and exercise window. Target audiences for stock options vary by company, ranging from all employees to select roles or leadership positions. Vesting, the process of transferring ownership of shares to employees, typically occurs gradually over a predetermined period, incentivizing employees to stay with the company until they fully benefit from their equity compensation.

Our current options program was approved after Series A, though considered earlier. Initially, the company had SARs, and in 2021, early employees received a substantial amount of shares. Post-Series A, we revamped the program to enhance competitiveness. As the company grows, we believe every team member is core to our success, so we offer this opportunity to all. The program offers competitive vesting periods, set at two years for employees and three years for top managers, compared to the typical 4 years in other companies. Additionally, an annual buyout opportunity was introduced, first offered on the company’s anniversary, to build trust and let employees take profits directly from  the growing value of the underlying shares. Despite the current crisis, capitalization has increased, with share prices growing by 1.5x in the past year, positioning the company on the path to becoming a unicorn. 

From our experience, we’ve gathered some valuable insights that may be beneficial for any startup considering stock options.

Firstly, documenting an option program requires meticulous detail due to its impact on shareholders, ownership, and profit distribution. Engaging specialized lawyers is crucial, as such documents can be extensive – for instance, our program document spans about 170 pages. To determine appropriate option allocations, examine industry peers’ practices and employee motivation expenditures, then present this information to the Supervisory Board for discussion and approval.

Another important – possibly most important – aspect is how the company communicates to the workforce on all matters regarding stock options. In our case we witnessed firsthand the various myths accompanying equity programs, which startups need to be aware of. Founders often fear losing control of the company, as stock options can dilute ownership and complicate management. Other myths include the beliefs that equity programs are too intricate to understand without financial expertise, that employees seldom receive the promised cash, that they are unprofitable, or that they are a gimmick in the startup culture, for show. While equity programs are useful, relying on them alone, without other benefits like recognition programs and performance management tools, creates the illusion that options are a panacea.

When launching our Stock Options program, we started with an employee survey to examine how our team feels about the matter. A lot of the results were positive: 56% of employees found it highly motivating, people saw Stock Options as recognition from the company (46%), a link between individual jobs and company performance (36%), motivation from ambitious goals (34%). Employees felt positively about quarterly distribution (32%), attractive conditions (29%), potential wealth in 2-3 years (29%), and a sense of belonging (27%). However, we saw worrying trends as well: some employees struggled with understanding the program’s terms and distribution criteria. Transparency issues were noted by 41%, and 34% were unsure how to earn more options. Excessive vesting periods (29%) and lack of choice between cash, benefits, and options (29%) were also concerns. Comments included confusion over the program’s complexity and skepticism about its financial benefits.

To communicate the program better, we used various channels and strategies: a co-CEO presentation, a Q&A with co-founders, and a comprehensive handbook in Notion. Employees can track their options quarterly via their profiles in our HRIS, Personio. Regular updates are provided through Slack, monthly town halls, and personalized messages. Each quarter, employees receive letters detailing their awarded options, and managers give verbal feedback linking goals, performance, and rewards. 

The process of integration and improvement is ongoing, and we are confident in our ability to create an efficient rewarding system for all team members. Our next steps include automated distribution, focusing on simplifying and enhancing the user experience. As CHRO, I want the program to evolve towards greater transparency and easy access to information about individual options.

Author

Anastasiia Dobrovolskaia, Chief Human Resources Officer at FINOM, drives a people-first culture focused on values, ethics, diversity, equity, and inclusion. With over 18 years of experience, she champions psychologically safe workplaces that enhance motivation, engagement, and team performance.