Hi GV, RE: "An outright stock grant has always been charged to expense, that's why you don't see much of it."
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OPTIONS GENERATE GROWTH.
Options motivate for growth BEYOND today's FMV. (Please reread) It encourages growth to go above grant price.
Most investors want stocks to go up, above today's FMV, that's why OPTIONS are used. They encourage growth above today's FMV.
There is no gain UNLESS the Optionee works to grow the Stock above FMV. Meanwhile, stock share grants are not vehicles to motivate growth beyond grant price and they burden the company. That's why options are used. Also, optionees always work for you, stock grantees already got their payment so don't need to.
Options motivate for growth BEYOND grant price. Investors want stocks to go up, above grant price, that's why OPTIONS are used.
So, your answer is wrong because it IGNORES MOTIVATION FOR GROWTH. You don't see stock grants in startup-land because:
Stock grants require:
1) Min $350 20 page contract
2) Huge amounts of time explaining a twenty page complicated contract to a newbie. An admin would have a harder time handling this.
3) An entry into the stock section of the table (where you only want investors)
4) Complicates due diligence or mergers
5) The risk that a startup exceeds the SEC max number of investors allowable (to be brief)
6) More accounting work involved
7) An audit flag
8) Less able to gain assistance
9) Cost goes up
10) REDUCES GROWTH & THE CAPABILITY OF RISK TAKING: PEOPLE helping startups are willing TO TAKE RISK FOR OPTIONS but less so for SHARES BECAUSE SHARES ARE TAXED ASAP WHILE OPTIONS LATER.
Additionally, like the Berkeley Chairman said: IT ONLY ALLOWS THOSE PEOPLE WHO ARE ALREADY RICH to enter this, not those who are trying to build their wealth. Basically, this is because a poor student WOULD NOT be able to do something for shares (because s/he would have to cough up tax money NOW rather than LATER.) By making the tax obligation LATER (which is what options do), this means OPTIONS ENABLE POOR STANFORD & BERKELEY & MIT & ETC. STUDENTS TO take on risks, be a part of Sillicon Valley's growth engine and enter.
Options are much more efficient:
1) A simple, no-cost one page form: vesting schedule, amount, name. Hand them the standard CompanyABC Option Plan that "everyone gets." And wow, everyone is willing to sign a one pager that references the Company's Plan (that "everyone has")without hours and hours of time-consuming questions out of management. They sign, you're done.
2) No charge to the one page form - law firm just updates system basically at no cost. An admin can handle this project - no time hit onto management.
3) No update required in the stock table section. Just the option section (meaning, inputting this goes much faster; your due diligence goes faster, your internal audit checks on accuracy go faster, etc.)
4) No risk of exceeding # of investors (since SEC excludes optionees from this count)
5) Means you only have the big stuff in the stock table (rest goes into option table) -- makes it is very easy to have an emergency board meeting to move fast on something - and eyeball your stock table - you don't have to dilly dally trying to eyeball your stock table.
6) Lower cost to process to company
7) Lower cost to get work done (people in the industry prefer options over shares) and ask for number of options = number of grant shares because of the benefit of deferred tax on the options): this is an excellent benefit & advantage for investors.
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8) OPTIONS ENCOURAGES GROWTH: It encourages RISK TAKING BECAUSE STUDENTS & PEOPLE & ADVISORS & VENDORS ARE ALL EAGER TO ENGAGE WORK WITH A STARTUP because it means they won't be taxed immediately (when they don't have the money), but later (when they have the money)!
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Please reread #8 1,000,000,000 times.
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9) ENCOURAGES GROWTH: Because more people are willing to assist for options than for shares. Pure and simple.
Please reread #9.
10) By giving Options at a Grant Price of $g, which is the Fair Market Value (FMV), the person is MOTIVATED to go BEYOND, by making their options GROW. Have you ever given someone stock vs options for something? The option holders ARE ALWAYS MOTIVATED TO HELP YOUR COMPANY OUT - BECAUSE THEY ONLY GAIN WHEN THE STOCK GOES UP. Whereas, if you give them stock, they gain if the stock doesn't even budge. (Why on earth would you want to give someone something that doesn't encourage growth?) So, of course, you want to give OPTIONS.
Please reread #11 about 1B times !
12) Do you REALLY think some network code could be built on the side by a summer Stanford student using stock grants rather than option grants? HELLO ???
There are many more reasons, but this is a few to get started.
The so-called law makers who have this country's best interest at heart, really need to see how startups bootstrap & get started.
With only 159 startups receiving funding in Q4, options is a more powerful fuel than printing cash, so if Congress kills the Option formula above, they've also just killed innovation and America's growth engine, as well as the ability for the less-advantaged to enter. Options is Silicon Valley's fuel.
Whether we like it or not, OPTIONS CREATE GROWTH.
If Congress kills OPTIONS because they want to count pennies, they've also just killed growth. That's being pennywise but very pound foolish. Look at the BIG picture: GROWTH. Do you want growth, or not? Or, should we cheer over a few pennies in the accounting dept?
(I don't have time to proofread this, hopefully it's a clear post.)
You kill Options, you negatively impact the startups that help Cisco get out of this mess.
Best regards,
Amy J |
