Lots of gaming startups have been adapting stock options as a way of incentivizing their employees for the long-term. The origins of stock options come from Silicon Valley startups. Because these startups didn’t have much cash and couldn’t compete with large companies in salary offers, stock options were used to attract some of the world’s best talent. The employees were offered a lottery ticket in exchange for a lower salary.
Employee stock options, which you’ll also hear referred to as an ESOP (employee stock option plan), are a pool of shares that are set aside by the founders and investors of a company to incentivize employees. An employee will receive equity in a company, so they have “skin in the game” and are motivated to do everything in their power to make the company a success to partake in a monetary upside. ESOP is set up by founders and investors, who’ve embarked on the VC route. It’s one of the best financial reward tools to gain alignment with your employees.
As the name infers, options allow individuals to buy shares of common stock in the company at a specified price per share, known as a “strike price.” A strike price is specified at the time the options are initially granted. This price is based on the valuation of the current financing.
How to allocate stock options
We at Elite Game Developers wanted to create a tool for calculating allocations. For this tool, we looked at examples in gaming; the stock options guide created by Index Venture and Buffer’s Open Equity calculator. We ended up using a hybrid. To make things clear, we created two example companies with allocations modeled out.
Here is the our template for allocating stock options.
We also suggest that you watch this video to get a sense of how to use the tool.
The formula is based on four variables.
- Role How hard is it to recruit for this role? It’s very similar to how you’d determine the salary for a person in a similar position.
- Choice Does the person prefer a higher salary vs. a higher equity stake?
- Risk How early did the person join? You take more risks when there are ten people versus sixty people.
- Seniority How long has the person been working in this role? Are they considered a senior?
Buffer created a formula which goes like this:
Role value * Choice value / Risk value + Seniority value
By using the values in our tool, you get to numbers between 0.01 and 2, which are the percentages of the company that the joiner would own once all their stock options had vested.
Index Ventures has created a very comprehensive guide to stock options. It covers everything related to the mechanics of vesting, retention grants, tax implications to the employee and the employer per country, and many wise tips on creating an open and fair stock option pool. Check it out by going to https://www.indexventures.com/rewardingtalent/
To get started, watch the above video and get our stock options template from here.