One of the many fascinating aspects of Facebook’s S-1 filing for its $5-billion IPO was how it handed options to employees, freelancers and contractors. This included graffiti artist David Choe, who accepted options rather than a few thousands dollars for painting Facebook’s first office.
It put the spotlight on the question about how generous startups should be with option grants.
On one hand, options are an effective tool to motivate and reward employees and people who have helped a startup and/or provided services.
For employees, it gives them skin in the game, particularly given the hours and effort involved. As much as employees may be compensated well, the benefits of giving people even a small number of options far outweighs the resentment of having founders hang on to as much equity as possible.
Options are also a good way to conserve cash because they’re seen as having no value unless there is a liquidity event.
On the other hand, a startup may not want to grant too many options because they can dilute existing shareholders.
At the end of the day, how often and how many options to grant is a balancing act. They can be a valuable corporate tool to drive and support growth. But like anything, there can be too much of a good thing, including option grants.
