A very important feature of a stock option is its exercise price.
It remains fixed and the earlier you receive the stock options, the lower the exercise
price usually is.
In your growth journey, you should strive to grant options at a lower rather than a higher
exercise price.
That sounds obvious, but let us look at that in some detail.
If you have a high potential employee who has not yet demonstrated performance, you
could consider two grant methods.
One for example, grant them 100 fresh options each year after that year's performance,
which then go on to West over the next 4 or 5 years.
Two, instead of granting each year, bunch them up and grant them say 200 or 250 options
today.
Add them West over the next 4 or 5 years, but link the Westing to performance.
The second alternative has some advantages.
One, it comes at a lower exercise price, while the yearly fresh grants would be at an increasing
exercise price usually.
A cheaper option is inherently more valuable than a more expensive one, simply because
the probability of profit is much higher.
It is more likely for a lower share price to increase compared to a higher one usually.
Two, by bunching up the grant upfront, you have provided the complete visibility of wealth
to that employee right away today.
100 options granted yearly do not do that very effectively.
While you have granted a large number of options today, you have also ensured yourself against
a bad performance by linking the Westing to performance and perhaps even by Westing
them back-ended like 10%, 20%, 30%, 40% over the next 4 years.
Doing this helps the company because an employee with complete wealth visibility might be more
motivated and it also usually takes fewer number of options to deliver the same intended benefit
than what you would need if you were to grant fresh options each year to that employee.
But when you grant options that Western performance, you need to be extra careful about designing
your performance conditions.
Let us look at that next.