By Berk Eker – Lawpath
When you’re starting a business it can be tough to pull in top tier candidates. Often you need to look outside the usual employee packages to attract the type of talent that’ll help you realise your dreams.
The answer to attracting top talent can be setting up an option pool for your employees to get them invested in the company’s success. It’s a good tactic but there’s a few ins and out you should be aware of before you open up your start-up’s shares.
What is an options pool?
Reserving shares in your company for employees by using an options pool is a great way to attract and retain quality staff. Normally, you would reserve between 10-20% of the company’s shares and offer employees the option to purchase the shares that are reserved for them.
This gives employees the ability to purchase company shares and profit in proportion to the company’s success.
Structuring your options pool
Usually, the younger the company is, the larger the percentage of stock or shares allocated to employees. The percentage is greater because of the increased level of risk the company has to fail in the earlier stages of its life.
The amount of the pool allocated to each employee can vary depending on position. Senior positions at the beginning of the company may easily be a large portion of the pool. Junior roles will typically be less. This is because the level of skill and experience required for the senior positions and the overall effect that they will have on the company’s success.
Options pools generally have a vesting period which means that there is a certain amount of time that needs to pass before the employee can sell their portion of the pool. Using a vesting period incentivises employees to contribute more to the growth of the company and acquire a greater return over the long term.
Helping your Start-Up Succeed
A huge advantage of having an options pool is it gives you the ability to reduce your potential losses. Let’s say your company goes bust and you had an options pool in place. Because you attracted employees with an options pool instead of paying a large amount of money as compensation, your cash losses will be significantly lower if your start-up folds.
Final thoughts
Options pools are a nifty way to entice top talent into your start-up company. Offering stock in a company is a good way to incentivise and encourage employees to promote the health and well-being of the company. The reduced need for capital and less risk makes options pools one of the go to choices for start-up companies.
Need some legal help for your SME?
If you are considering starting up a company it is advisable you seek legal advice. Feel free to reach out to our partners at Lawpath to get a free quote today.
Get a fixed-fee quote from Australia’s largest lawyer marketplace by visiting the Lawpath website or call their friendly team on 1800 529 728.
