Exercise Your Options

The Flip Side

Aren't there drawbacks to options? You bet. Plans can easily run afoul of securities and tax laws as well as accounting rules. "You can make a lot of big, expensive mistakes," says Myers. "Before setting up an options plan, get legal and accounting advice."

The bigger worry, though, is dilution of shareholder value. Hand out too many options that get converted into stock, and suddenly per-share earnings can tumble dramatically. "This becomes an issue when you're looking for bank financing or are wanting to do an initial public offering," says Morse. "The more options outstanding, the weaker your position."

Is that enough of a worry to put the brakes on an options program? Not judging by their mounting popularity. "More businesses are looking into doing this than ever before," says Morse.

"[In addition,] under the law, you can be very selective about when and to whom you give options," says Myers. Where might you put options to best use? Nowadays the three chief uses are in employee recruiting, where hefty options awards are dangled before job candidates; as bonuses for key employees who help the business hit certain tangible targets (sales or profit goals, for instance); and, lastly, as across-the-board awards to all employees to help keep them motivated. What formula will work for you? There is no generic recipe. But good advice is to start small--award tiny parcels of options and watch for the results. Odds are, you'll see real improvements quickly, and you'll also discover the best way to use options in your company.

In most cases, too, employees become more valuable in tandem with their ownership stake. "The bottom line," says Morse, "is that options turn employees into owners--and owners do act differently."

Contact Sources

David Morse, c/o Whitman, Breed, Abbott & Morgan, fax: (212) 351-3131; (212) 351-3131

Marlee Myers, c/o Morgan, Lewis & Bockius LLP, 32nd Fl., Oxford Ctr., Pittsburgh, PA 15219, myer3310@ mlb.com

Wilton Sogg, c/o Hahn Loeser & Parks, 3300 BP America Bldg., Cleveland, OH 44114, (216) 621-0150.

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This article was originally published in the April 1998 print edition of Entrepreneur with the headline: Exercise Your Options.

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