Pros & Cons of Giving Employees Stock Options at an IPO

Stock options can help your company grow.

If you are a business owner, giving your employees stock options before an IPO (Initial Public Offering) could potentially help your business in the long run. Stock options give your employees the right to purchase shares of stock at a particular price by some date in the future. Giving your employees stock options prior to an IPO can be beneficial, but it also has a few drawbacks to consider.

Incentive

Offering your employees stock options before an IPO can give them an incentive to work hard for you as a business owner. These employees know that if the company does well, their stock options will become valuable. They will then want to put the goals of the company ahead of their own and will be willing to work harder. This puts your employees in an ownership position, and they will treat the business as if it were their own.

Retain

Employee stock options also help you retain talented employees. Many businesses suffer from high rates of employee turnover. If you get your employees involved with stock options early on, you will not have to deal with this problem as much. Some people will inevitably still leave the business, but many of your best employees will want to stick around for the long-term. Having continuity in your business will give you an advantage over your competitors.

Morale

Many business owners find that offering stock options to employees improves morale. When you can give your employees a share of ownership in the company, they will enjoy coming to work. They know that their efforts will directly impact their financial situation and will be more willing to work together. Instead of looking at the situation as the employees against the employer, they will look at the situation as if everyone were working towards a common goal.

Lack of Diversification

One of the problems with offering employee stock options is that it often leads employees to rely too heavily on them for their financial success. A wise approach to investing would involve diversifying your available resources over several different types of investments. Many employees who have access to stock options will put everything they have into them. This puts a lot of pressure on the company to succeed. When employees are relying on the company for their retirement, it changes the responsibilities for everyone.

Loss of Focus

In some cases, when you give stock options to employees before the company goes public, they could potentially lose focus on the job at hand. Sometimes, the price of a company's stock goes up significantly during an IPO. When this happens, the employees that have the stock options might be more concerned with the value of the stock options than focusing on their job. This could potentially lead to lost profits shortly after the IPO is completed.

References

• Finweb: The Value of Employee Stock Options
• Mainstreet: Employer's Stock, The Pros and Cons