The Startup Checklist

18Establish a Stock Option Plan to Incentivize Your Team

One of the major attractions for most employees who are considering working for a startup (rather than a long-established company) is the chance of receiving equity—thus becoming a partial owner of the company—as part of their compensation. If the company goes on to be very successful, there's a chance that their equity share may make them extremely rich. So getting in on the ground floor of a promising business is attractive to a degree that the salary alone rarely justifies.

If you are an entrepreneur on the verge of hiring your first employees for a new startup business, you should consider establishing a plan that will enable you to provide equity participation for the key people you want to attract. This might be optional for a traditional company, but you are starting a scalable, high-growth business—and in today's market, that means that an employee stock option plan is mandatory.

As I've suggested several times in this book, begin by talking to a lawyer who is familiar with setting up startups rather than try to handle things yourself. When the company is first registered (since only you and your cofounders are owners of the business) you don't need to set aside shares for anyone else. That happens only when either (1) you start hiring employees who will receive options instead of shares, or (2) you take your first equity investment (such as in a Series Seed or Series A convertible preferred stock financing) from ...