Many companies are now avoiding giving employees stock options. The main reason is, at the end of the day, it ends up being a burden to the company. In as much as stock options are an alternative to increasing employee salaries, they result in a huge accounting burden. Besides, if the stock prices go down past a given number, employees cannot exercise their options. This has made employees wary of this method of payment. Instead, they would rather go for a pay rise.
In as much as stock options seem to have many disadvantages, it has even more advantages. When employees are given stock options, in a sense they own the company. Knowing that their investment depends on the company’s profitability, they will put in more effort to make the company profitable. This eliminates the need to motivate employees to work harder. Compared to equity and insurance coverage, stock options are easier for employees to understand. By giving its employees stock options, a company faces lighter tax burdens compared to when they increase employee salary or give the equity.
For a company to enjoy these benefits of stock options, they need to adopt a strategy that keeps them from losing money. Considering the fact that a company loses only when employees are unable to exercise their options, they can adopt a knockout clause to prevent this.
Jeremy Goldstein, a partner at Jeremy L. Goldstein & Associates LLC., explains how the clause works. When a company incorporates a knockout clause, employees lose their options if the stock prices go below a certain price. For the knockout clause to be effective, the company has to give a definite number. The clause will only be effective if the stock prices stay low for at least a week.
Incorporating the knockout clause allows employees to enjoy full benefits of their options and prevents the company from losing money because of hangouts.
Jeremy Goldstein specializes on advising corporate committees, management teams and CEOs. He has been involved in many corporate transactions including the Dow Chemical Company/Rohm and Haas Company. Before starting his own firm, he worked at Wachtell, Lipton, Rosen & Katz. Learn more: https://www.linkedin.com/in/jeremy-goldstein-26aa1b4