| | start end text |
| | 0 8080 While discussing the ATOM 60 stock options framework, we mentioned that when you think |
| | 8080 14000 about how many stock options to grant to an individual employee, you must bear in mind |
| | 14000 17720 that the financial benefit to that employee must be attractive. |
| | 17720 22800 We also discussed that attractiveness can be quite subjective and usually depends on |
| | 22800 27360 the earning capacity or annual worth of an individual. |
| | 27360 33440 So a benefit of $200,000 in four years might seem attractive to someone earning $50,000 |
| | 33440 39120 a year, but may not seem so attractive to someone earning $100 million a year. |
| | 39120 43560 So how do you decide what the intended benefit must be? |
| | 43560 50920 Well, you look at it with respect to their criticality rating and their annual worth. |
| | 50920 56520 Let us say you have an employee in a senior role that bears the highest criticality rating |
| | 56520 63160 a drawing a salary of $75,000 per annum because they have taken a pay cut, but their market |
| | 63160 66800 worth is $200,000 per annum. |
| | 66800 70680 What would be an attractive intended benefit for such a role? |
| | 70680 76720 Also, being a startup, let us consider a horizon of say four years, after which you expect this |
| | 76720 79560 individual to earn that benefit. |
| | 79560 84120 You would also waste those options over four years and you might assume a liquidity event |
| | 84120 90680 of some sort, which means someone willing to buy your shares after about four years. |
| | 90680 97480 So we have a senior role rated criticality A with a market worth of $200,000 per annum. |
| | 97480 103760 What would be an attractive intended benefit for such a person after four years? |
| | 103760 108360 While we will provide you with a few guidelines, I want you to think about this along with |
| | 108360 109360 me. |
| | 109720 111480 Let us start small. |
| | 111480 117960 Would earning an extra $25,000 from stock options after four years be very attractive? |
| | 117960 119960 Probably not. |
| | 119960 126120 While some money is better than no money, it may not exactly classify as very attractive |
| | 126120 129040 at a senior criticality. |
| | 129040 132520 How about $200,000 in four years? |
| | 132520 138280 Well that certainly sounds like a significant improvement over $25,000, but let us examine |
| | 138280 139640 it further. |
| | 139640 145120 $200,000 in four years means roughly $50,000 extra per year. |
| | 145120 151360 But this person also took a pay cut, so they lost $125,000 per year in salary. |
| | 151360 156840 While they earned only an extra $50,000 a year out of stock options. |
| | 156840 160400 Now it does not look so attractive. |
| | 160400 165240 Build your own personal scale to make these calculations. |
| | 165240 169240 A good thumb rule to use is as follows. |
| | 169240 175440 For someone at the highest criticality rating A, start with an intended benefit of about |
| | 175440 180760 six to eight times their current market worth in four years. |
| | 180760 186240 We always assume the intended gross benefit for an employee, just like we mostly talk |
| | 186240 191360 about the gross salary and not the salary after tax. |
| | 191360 198200 So in our example, using six to eight times the current worth of $200,000, the intended |
| | 198200 204360 benefit comes to about $1.2 to $1.6 million in four years. |
| | 204360 209400 Considering that they gave up a cash salary of around half a million dollars or more in |
| | 209400 214400 four years, they would still profit from their stock options. |
| | 214400 221500 If you go up to 10 or 12 times, the amount would be $2 to $2.4 million in four years. |
| | 221500 228080 This was for criticality A. You could use the same or a descending multiple for criticality |
| | 228080 235600 ratings B, C, D, and E. So if criticality A is eight X of the annual worth in a four-year |
| | 235600 244240 period, B could be six X, C, four X, D, three X, and E, two X. |
| | 244240 249360 Using a descending multiple essentially means you're using a weighted system where you |
| | 249360 253960 assign higher weights to higher criticality ratings. |
| | 253960 259440 If you were to use the same multiple throughout all the criticality ratings, people would |
| | 259440 266760 still get a different number of stock options because their salary might be different. |
| | 266760 271320 The difference in the grand numbers between two people under this method would be less |
| | 271320 273720 stock. |
| | 273720 278720 Using a higher multiple for higher criticality ratings might be reasonable to do in many |
| | 278720 284480 instances where you believe that the ability to create value goes up with an increase |
| | 284480 286760 in criticality. |
| | 286760 291680 Try both the options, the same multiple for all, and a different multiple for different |
| | 291680 293120 ratings. |
| | 293120 298280 Think about it for some time and then decide what works best for you. |
| | 298280 304440 So to recap, we start with calculating the intended benefit for an employee. |
| | 304440 309600 An amount attractive enough for that individual at that criticality rating. |
| | 309600 315000 But this amount will be earned by them through stock options and not as a cash bonus. |
| | 315000 320400 You need to determine how many stock options you must give them so they can earn this intended |
| | 320400 325080 benefit of $1.6 or $2 million in four years. |
| | 325080 329720 They will earn this amount by selling the shares that they receive after exercising |
| | 329720 331000 the options. |
| | 331000 338080 So you need to understand how much profit one equity share might provide in four years. |
| | 338080 341840 To do that, you need to look at your financial projections. |
| | |
