Typical ceo stock options
The Success of Giving Employee Startup Stock Options
The problem is that a CEO may take excessive risks to drive up the share price. While that might increase the CEO's compensation, he or she won't necessarily share other shareholders' pain if the stock loses value.
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Options exhibit "convexity," which means options granted to CEOs have a potentially unlimited upside, while the downside is limited to zero if the stock doesn't rise to the predetermined price. Shue and Townsend write that researchers in the past found a positive relationship between options and risk-taking, but "the magnitudes vary from large to near-zero.
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Shue and Townsend sought to identify a causal effect—to measure the direction and magnitude of the effect of options on risk-taking—through a natural experiment involving typical compensation plans that grant options. The experiment compared the performance of companies that grant a defined number of options with the performance of those that award options worth a defined amount.
In a startup, it's not how many: it's what percentage
In the former, the value of the grant has the potential to rise and fall with market movement. In the latter, the value is fixed over a two- to three-year period. That difference provides the authors with a control group for their study. The experiment also takes advantage of the fact that companies typically grant options on a regular schedule with large raises once every two or three years.
Executive Compensation
It has become conventional wisdom that big stock-options grants cause CEOs to take big risks. The US-government sponsored Financial Crisis Inquiry Commission FCIC , in a report, blamed stock-options grants for contributing to the —10 financial crisis, concluding that "these pay structures had the unintended consequence of creating incentives to increase both risk and leverage.
Despite the FCIC's statement, the evidence to support its claim has been light. Townsend of Dartmouth College's Tuck School of Business, produces empirical evidence that ties stock-options grants to executives' risk-taking and increased leverage.
The researchers find that such grants encourage executives to take on more risk and debt, but not to the extent the popular narrative suggests. The argument for paying a CEO with stock options is that it gives the executive an incentive to increase value for shareholders.
Understanding Startup Stock Options
If the CEO drives up the underlying stock price, the options award will be worth more. The problem is that a CEO may take excessive risks to drive up the share price. While that might increase the CEO's compensation, he or she won't necessarily share other shareholders' pain if the stock loses value. Options exhibit "convexity," which means options granted to CEOs have a potentially unlimited upside, while the downside is limited to zero if the stock doesn't rise to the predetermined price.
Executive Compensation |
Decide on an option strategy e. Then list out each position and how many stock options should be allocated for each person. Get inputs from your prospective investors as to the size of the option grant that is appropriate to different positions e. Add up all of the Common shares owned by founders, plus the Preferred shares that will be purchased by the investors, plus the total number of shares that are allocated for options or warrants.
Again, get input from your VCs they will have to agree anyway, and different VCs have different biases on options.
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As a starting point:.