tangentalizingly delicious

Wednesday April 26, 2006

I recently was invited to attend a round table style seminar thingy hosted by Watstart discussing methods of compensation that are commonly used by startups in lieu of cash.

The most common, and the primary focus of the discussion, is stock options. The two presenters, from Ernst & Young offered up an overview of what stock options are, how they work, and some of the ramifications (mostly in terms of taxation issues) for both owners granting them, and employees receiving them.

Most of the people there were founders of small companies, and many had experience with multiple companies and stock options (and alternate compensation) from both the granter and grantee position. For a mostly fly-on-the-wall participant it was great and informative.

I was really impressed with how much everyone there seemed concerned about employee welfare when it came to stock options. One of the folks was originally from the States and described how he’d been burned, as an employee, when he excercised his options and help onto the stock which then crashed and he was left holding the tax bill.

To a degree, Canadian tax law helps protect employees (not contractors or consultants) of small, privately held Canadian corporations (CCPCs, Canadian C-something Private Corporations I think). If I’m granted 100 options, which vest, and I excercise them, it isn’t at that point considered a “taxable event”. The tax on those stock isn’t charged until I divest myself of them.

It did the cynic in me (who is reasonably tired of making other people money and not really being involved in it) a little good to see that not everyone is just out for their own best interests, and were actively looking for win-win situations.

One of the most interesting examples given was by a gentleman who needed to reduce his payroll but wanted to give his employees something in return. Rather than giving them stock outright, or just giving them options that might eventually do well, he granted them options that vested immediately and had them excercise them immediately for 1 cent/share.

This had the effect of giving them stock outright so they had immediate and real value in exchange for the reduced salaries, but it didn’t result in them paying taxes on the sudden income.

All-in-all, it was a really useful overview. I already knew something about stock options, having had them granted a number of times in the past, but seeing it from an employer’s point of view is pretty interesting stuff too.

I am pretty skeptical of stock options, overall, and of most forms of alternate compensation, which is sort of weird considering how much I gripe about making other people money. Stock options and things like profit sharing or other ways of letting employees share in a company’s growth are genuinely intended to recognize the effort someone puts in to building something, but I find, for me, that cold hard cash does a really good job of that too.