Stock Options for Services Companies: Smart or Stupid?

Imagine you are the owner of a company that provides services. You are the lucky man or woman who owns 100% of your small but ambitious company. Inevitably, you must ask yourself the following question: Should you give your employees stock options, or keep it all to yourself?  

I don’t hold all the power in my company. In fact, I attribute much of my success to having empowered people across my organization. So why would I want to retain all the stock? 

To be clear, it’s important to me that my people feel they have a stake in the company. When people feel ownership, they feel central to your company’s mission. And I never want them to view me as some greedy overlord. The trend is, however, that services companies rarely give their employees equity: Generally speaking, they do not grow tenfold annually and are rarely built for an exit.

With all that said, let’s go back to our question: Should you give your employees stock options, or keep it all to yourself? The right answer for you really depends on your ultimate goal.

Are you focused on attracting and retaining high-quality employees? Without a doubt, if this is a goal for you, it makes sense to give equity to local employees in the form of generous stock options. After all, you are competing for talent with venture-backed companies that already do that for their employees. In addition, with the exception of some lawyer expenses that can be minimized, it’s not going to cost you a dime. The arrangement doesn’t involve profit sharing, and your employees still have to buy your stock if they want ownership.

Do you want to motivate your employees? Since stock options give employees genuine ownership of a portion of your company, having stock options may help motivate better performance. After all, with stock options, the success of your business has a direct impact on their financial situations.

Are you planning an exit? If you are planning on potentially selling your company or taking it public, stock options become even more attractive to your employees.  

Are you planning on NEVER exiting? If you’re building a cash cow type of business and never plan to exit, giving stock options to employees is simply unfair. It’s like giving them false hope.

All that being said, if you aren't a startup company and your stock already costs something (i.e., it's not $0.0001), it gets a little more complicated. For example, let's say you issue 10 million shares and set aside 10%, or 1 million shares, as a pool for your employees’ shares. Of course, company valuations vary, but – for the sake of argument – let's assume your company is valued at $1M. That means if you were to give a member of your team the option to buy 1% of your company, it will cost them $10,000. While this isn’t much, if you aren't exiting anytime soon, the cost may cause many people to opt out of buying the stock.  After all, from the perspective of an employee, why would you buy company stock that will never convert into real money?

In other words, giving employees stock options is smart when it sets up a win-win situation for both you and your employees. But if your stock options don’t have the potential to convert to the actual value for your employees, it is no longer a win-win, because your employees are the ones who lose.