Tuesday 15 June 2010

Motivating with share options

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Quite often European startups get their first taste of share options only when US or UK investors step in. In most cases investors recommend founders to set aside options for the team and require that the management issues options to all team members. There is nothing wrong with it per se, however there is and important difference in the goals they try to achieve. 

Options are a part of compensation in US. They are just something extra in Europe. They bring no motivational value to the developers, simply because the culture is not developed yet. Employees get motivated by the thrill of the environment, a chance to work for an international start up, exposure...they aren't motivated by options, since it has only an abstract value.

It gets worse. In quite a few European countries tax law is totally unprepared to handle employees with options, to the point that in some countries people get tax at the time of grant!

So what to do in environment where share options are a novelty:
- trust the managerial instinct, how would management motive employees, would it come up with option scheme on their own?
- top management team members should get inline with world practices, so get options, since they'll be the ones who'll promote the concept further
- for employees from environments where option based compensation is the norm, offer competitive packages
- if you really want to issue options to everyone, offer to grant a generous amount of option for a 10-15% salary cut ... in that case options will get value
- check how your country handles options, can it be substituted for share grants? There is nothing worse than a promise of something for which you have to pay additional money for after some period.

All in all, don't stubbornly pursue models that work in some environments and try to cut/paste them to your environment.  Think what motivates your employees, particularly engineers, offer things that produce leverage!

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1 comment:

Anonymous said...

I agree with what you said. My options certainly don't motivate me more. Then again, I don't think I am lacking motivation anyhow. What options can do is confirm a sense of fairness.

On a personal note, it is highly unlikely that I would take a 10-15% salary cut for options. It usually takes years until startup exit, exits these days are not large and your share as an employee is fairly small.

You are still ahead if everything goes right, but difference is not big enough for someone like me to gamble on something that is largely outside of my control.