Whether you are a bricks-and-mortar business or a dot-com, all owners of growth companies need to attract, retain and motivate key management to elevate their businesses to the next level.
As a growth company, using large amounts of cash to achieve this is often not an option. One alternative being utilized more and more is stock options.
There are two types of stock options -- qualified (e.g., incentive stock options, commonly referred to as ISOs) and nonqualified. There are numerous factors to consider prior to adopting either type to ensure that both the company granting the options and the employees receiving them can take advantage of the corresponding tax benefits.
There are advantages and disadvantages associated with both. Here are a few of the major differences, including key factors to consider when deciding which type of option to adopt.
Qualified options (ISOs)
- Recipients of the options are taxed at the time of the ultimate sale of the stock acquired on exercise, not at the time the option is exercised, delaying tax liability.
- Recipients are taxed at the capital gains rate rather than at the ordinary income rate, assuming the minimum statutory holding requirements are met.
- ISOs are limited in the amount of stock that can become exercisable in any calendar year.
- These are not limited in the amount of stock that can be awarded on an annual basis.
- They allow the company issuing them to take a tax deduction for employee compensation.
- Recipients are taxed on the appreciation in value of the stock at the time the option is exercised, rather than at the time of the ultimate sale of the stock. This may leave the employee with an income tax liability with no means to pay for it if the stock is not sold at the same time the option is exercised.
- Recipients are taxed at ordinary income tax rates on the appreciation.
Regardless of the type of plan implemented, there are several issues to keep in mind when evaluating and adopting a stock option plan.
Size of the option pool. While there is no hard and fast maximum amount, many companies typically set aside 10 to 20 percent of the equity to be granted to key management and employees. When calculating the total percentage to be allocated for the option pool, don't forget to account for future employees who will be hired to round out the management team.
Awarding the options. Typically, options are awarded based on performance measures that will result in the company achieving its overall business strategy and growth/profit goals. The primary goal of options is to use equity ownership to align the interests of employees with those of the company and to motivate employees to reach the company's long-term goals.
Vesting of options. Typically, options will vest (become exercisable) over a period of time. By utilizing a vesting schedule spread over several years, companies can lock in key employees. However, the plan or the option should also include forfeiture provisions in case an employee leaves before the options vest.
Stockholders' agreement. Recipients of the options should be required to execute a stockholders' agreement at the time of exercise of the options. This may contain a number of restrictions on the stock (e.g. forfeiture provisions, buy-back provisions for the company, restrictions on transfer, etc.) and virtually any other terms the company desires within the bounds of the law.
Noncompetition/nondisclosure agreement. When adopting and implementing a stock option plan, business owners are presented with the perfect opportunity to have their key employees execute a noncompetition/nondisclosure agreement. As a potential stockholder in your company, following exercise, recipients of options will have access to valuable and proprietary corporate information. The noncompetition/nondisclosure agreement serves to protect companies from the potentially damaging scenario of losing a key employee and his or her intellectual capital to a competitor.
Numerous factors and laws govern stock option plans. A company's decision to implement a plan should be made only after careful consideration of its circumstances and financial position and consultation with legal and tax advisers.
Whatever the route, employers should feel out their key management and employees to see what will motivate them. Employers and employees often have opposite views on this subject.
The goal is to motivate, not aggravate. The good news is that the "options" are many. Lee Koury (email@example.com) is an attorney at Arter & Hadden LLP and a member of the firm's E-Group and Growth Group. The Growth Group is a multidisciplinary group of attorneys which focuses its practice on entrepreneurs and emerging growth companies. He can be reached at (216) 696-5677 or through the company's Web site at www.arterhadden.com.
In most cases, when we evaluate ourselves against the rest of the business world, we tend to compare ourselves to those above us.
We might look at people who are making more money than us, those we perceive to have a better job or those we aspire to be like. In doing this, we will always conclude we are not as successful. We will always be a notch below where we think we should be.
The real deception is there are always going to be people who run larger companies, make more money and are deemed more successful. No matter how far you move up the ladder of success, there's always going to be someone on the rung ahead of you.
It is a race that cannot be won, and there's a steep price to pay for entering it. We will never have a real sense of purpose if we use this as our barometer of success.
Here are five steps to help put things in perspective:
1. Many people ask if what they are doing today is what they should be doing. The answer is yes. If this weren't true, they wouldn't be in that job. You are where you are supposed to be, so quit wondering and start working.
2. Do the best job you can in whatever you do.
3. Do not compare yourself to others. This only causes ungratefulness and focuses on what we don't have rather than what we do have. This causes envy and jealousy.
4. Be thankful for the position you are in. This isn't always easy, and some days or years are better than others, but keep in mind that more than 2 billion people in the world live on less than one dollar a day. While many of your problems may seem severe, take a step back and re-examine them.
There are so many people that go each day without the basic necessities like food and water. Is what you're worrying about really a crisis? It is very important to always keep things in perspective.
5. The goal is to achieve a sense of contentment and happiness. When that happens, a sense of purpose is realized. You will start to enjoy the fruits of your labor. This is a sign of strength, not of weakness. It doesn't mean you are not ambitious, just that you are enabling yourself to enjoy the ride.
These steps will help you live in the present. Too often, people are thinking about the future. They spend too much time focusing on their next pay increase, promotion or career change. Just because you're not on the top rung of the ladder doesn't mean you haven't been successful.
Slow down and enjoy some of your accomplishments. If we are always living for tomorrow, we can never really experience the true joy of today. Fred Koury (firstname.lastname@example.org) is president and CEO of SBN Magazine.
As businesspeople, we have a fiduciary responsibility to ourselves and to our companies to measure the investments we make.
Investments include inventory, office space, equipment, even employees. Too often, we don't have benchmarks in place to really measure the return on these investments.
By not measuring the success or failure of the ideas we implement, we put ourselves in a vulnerable position. If too many investments are made at once, cash flow can quickly dry up if they don't pay off. People and resources will be diverted to unproductive projects, while money-making ventures sit idle or never become as lucrative as they should.
With no tangible measurements, it becomes easy to spread our resources, especially capital, too thin while working on too many projects at once.
Here are several suggestions to help you avoid this mistake.
1. Set goals and establish a timeline for a return on each investment. Be realistic, because some things take time to mature. Make sure the company is financially sound and can handle the downside of any investment you make.
Be prepared for the worst-case scenario. You'll be able to manage better knowing that your company is prepared, allowing you to focus on creating success rather than avoiding failure.
2. Put it in writing and share it with the right people. Give employees the information they need to do their jobs, and let them know how you want them to measure progress.
Employees need to understand your goals. If they are not clear about the goals, you risk them pushing the idea in the wrong direction.
3. Make yourself and your employees accountable through key performance measures reported on a periodic basis to assess your progress. This helps keep key people informed on how the company is progressing toward achieving its goals. Keep regular tabs on why projects are or are not working as predicted, and make the necessary adjustments.
4. If you are not receiving a return on an investment, weigh your options. If the return is there, continue funding. If it is not, don't delay in making the difficult decisions. There are many reasons something looked good to start with, then soured. Economic conditions change, key employees leave, new competitors enter the field.
5. Make decisions that are in the best interest of the companies well being. Leadership falls on you. Reassess why things aren't working and pull the plug, if necessary, then refocus that capital on more promising projects.
As your company grows, the need to establish benchmarks to measure progress grows with it. Benchmarks provide vital information on which to base your business decisions, and give you quantifiable data as to which projects are worth pursuing.
With a tightening economy, it's more important than ever to carefully manage every dollar. Take the time to establish benchmarks now, so you can continually evaluate performance.
If push comes to shove, you'll know exactly what needs pushing and what needs shoving. Fred Koury (email@example.com) is president and CEO of SBN Magazine.
People take for granted that the information on their credit reports -- personal or business -- is accurate. That's a big mistake. These reports are plagued with errors and inconsistencies. Each day, business owners are taken advantage of because no one speaks up.
Credit ratings are more important than you realize. As SBN Cleveland reported in "The credit crisis" in November 2001, a business owner can make a significant amount of money and have millions of dollars in the bank, but neither his income nor his assets are listed on a credit report.
Another point we noted: If you have a credit card with a limit of $5,000 and your balance is $4,000, your credit score will be lower because it looks as though you are overextended, regardless of your payment history. (To read the article, go to www.sbnonline.com and click on Executive Briefing.)
Of course, you can always report errors to the appropriate credit bureau, which has 30 days to investigate disputed items and resolve them. But you still have to go through the aggravation and legwork. The approach to credit scoring needs to change.
Here are four steps you can take to make a difference.
1. Contact your congressman. I know this is a hassle, so I'm making it simple. Listed below are the names and contact information for your local representatives. Let them know if you've been affected by the current method of credit scoring.
2. Contact the Better Business Bureau. While the BBB doesn't wield legal authority, it has a significant voice in mending broken business practices.
3. Check your credit rating. Until the guidelines of these companies are changed, we have to play by their rules. Order a copy of your credit report each year to check for accuracy. If there are mistakes, put your complaints in writing.
4. Send me an e-mail. If you have had a legitimate complaint regarding a credit bureau in recent months please forward it to me and I'll make sure they are all consolidated and forwarded to the right people.
SBN Cleveland contact info
Sherrod Brown: (440) 934-5100 firstname.lastname@example.org
Paul E. Gillmor: (419) 734-1999 www.house.gov/writerep/
Dennis J. Kucinich: (216) 228-8850 www.house.gov/writerep/
Steven C. LaTourette: (440) 352-3939 email@example.com
Stephanie Tubbs Jones: (216) 522-4900 firstname.lastname@example.org
Better Business Bureau: (216) 241-7678
What do you think this expression means?
The word "sow," according to the Webster dictionary means, to scatter for growing; to plant seed; to spread or scatter for growth.
You are always sowing either for good or for bad, whether you realize it or not. All things come to light in due time -- maybe not in the timeline we would like to see it in, but in God's timeline.
One recent example is the Enron fiasco. This energy company, with its accounting firm and others, was not honest with the way it reported its finances. What you may not know is that several years ago, it got rid of its core value statement it was using as the foundation for its management principles.
We all know what happened next: Disaster for the company, its leadership and its employees. They were sowing bad seeds. We must take responsibility for our actions. Too often we look outside ourselves and blame others. If you sow blame, you will reap it as well.
It's time to quit passing the buck. Start taking responsibility for your own happiness.
Listed are five areas we sow each day in the business world. We need to be aware of what kind of seeds we are sowing because the seeds we sow today will affect us tomorrow.
1. Treat your employees well. Your employees are a reflection of yourself. If you treat them badly, they will treat your customers that way. Show them the dignity and respect they deserve, and those ideals will take root throughout the company.
2. The customer is always king. Are you treating customers the way you should? Remember, the most effective advertising is word-of-mouth, and the only way to get that is to treat every customer like royalty.
3. Treat vendors as partners. If you treat them fairly, they will do the same for you.
4. Be happy for your peers. Don't sabotage the success of others with petty jealousies.
5. Be grateful to God for your lot in life. We have a much better life than many others in this world.
The measure you use with others will be the same one used with you. Treat others the same way you'd want to be treated if your positions were reversed.
Today is a good day to start making sure you are sowing good seeds.
If you surf the evening news or the cable news networks, one thing is certain: All news is bad news. If you create your perspective from television, you probably think the world is going to end tomorrow. This attitude of despair has crept into the workplace. The constant bombardment of negative messages, combined with a challenging economy, has not only the employees in a panic but some CEOs, as well.
While there may not be a “good news” channel on TV, you need to create the equivalent in your organization. You will be the anchor and will explain how there are no problems, just opportunities.
The CEO sets the tone for the office, and an attitude that’s focused on the glass being half-full is contagious. You have to put forth the energy to constantly be positive, because it’s too easy for people to focus on the negatives. A positive attitude can rally those around you, and conversely, a negative attitude can be destructive. Words have power they can boost someone up or cut someone down. You have to create the vision that pushes people toward the positive and keeps them from fixating on the negative and constantly reinforce this message every opportunity you get.
Where they may see only bleak outcomes, you must see challenges that can be conquered. Not only must you identify the challenges, you also need to share the positive energy it will take to overcome them.
Walt Disney always saw the glass as half full. When he opened Disneyland in 1955, it was the world’s first theme park. It was a huge risk investing in something that had never been done before. A decade later, people thought he was even crazier when he bought up a bunch of swamp land outside of Orlando, Fla., to build Disney World. Where some people saw worthless land and risky business ventures, Disney saw places where families could go and have a good time.
Facing challenges with a positive attitude doesn’t mean you become overly optimistic. It just means you focus on the positive and build outward from that. One person can look at a business and see it as doomed to fail. Another person looking at the same business can see a great opportunity. It all depends on your attitude.
Within an organization, it’s important to have everyone working together. The saying about a little bad yeast spoiling the dough rings true when it comes to the people who work for you. The naysayers will spend their time complaining about their jobs and the bleak future of the company rather than working to do something about it. They become a cancer that spreads through the organization, crippling it. You have to take whatever steps necessary to rid yourself of these types of people; otherwise you’ll never make progress. Sometimes bringing in people with fresh perspectives is all it takes to get a department or an entire organization looking at things in new ways.
If you find yourself starting to fall victim to negative thinking, then you need to get a little perspective. Even with your troubles, you have it much better than most people in the world. It’s a privilege to be in a position of leadership, and you’ll always have a chance at another venture, even if your current one fails. Great leaders can go from boom to bust and then back again. You may have problems, but this is a country of second chances.
No matter what happens, you have to remind yourself to be positive and work toward solutions. If you see the glass as half full, those around you will start to do the same.
A man invested in a piece of real estate many years ago as part of a partnership in which he was the majority owner. The agreement stated he had pretty much free-ranging authority to do whatever he wanted, including amending the basic agreement. Recently, he moved the property into a trust.
The problem is, there was a caveat in the contract that stated that if the property were ever moved into a trust, the minority owners could buy out his majority share at book value.
As a result, he’s probably going to lose control of the future of the property that he’s managed all these years.
The lesson is simple: When it comes to legal matters, it’s the little things that can get you.
The contract hadn’t been reviewed in years, and a few sentences buried in the agreement completely changed everything.
While all of us would much rather be thinking about how to grow our businesses rather than quibbling with attorneys over the wording used in the second-to-last paragraph of a contract, a simple oversight could lead to disaster.
When you are making deals, it’s easy to get excited and start overlooking the details. But over time, circumstances change. It doesn’t matter whether it is taxes, partnerships, mergers or estate planning. It pays to have an attorney review all of these documents not only before you sign them but also from time to time so you don’t make any missteps that would jeopardize the contract, regardless of whether you are a Fortune 500 company or a family business.
Spend a little money upfront to prevent having to spend a lot of money later on. You have to look at a relationship with a law firm as an investment in your company. For many mundane services, you can negotiate a flat fee to fix your costs and avoid any surprises.
If you take the time to build a relationship with a firm or firms, you can get a lot more value out of it. As they get to know your business better, they can advise you of potential risks that you may not be aware of.
Attorneys can also help you out in other areas, such as assembling a board of advisers to help guide you to your growth goals or preparing your business for an initial public offering. They also often have great connections throughout the business community and can help you network, as well. As you build the relationship, your lawyer can become a trusted member of your inner circle.
Make sure you talk about costs upfront, regardless of whether you are working with a single attorney on a routine matter or with a multinational firm on a major acquisition. A big reason why executives often avoid lawyers in the first place is because of the fear of costs. In this economy, every nickel counts, and being handed a legal bill that is four times what the estimate was is not something you want to deal with.
Try to get as many services as possible done for a fixed rate to control your costs. There are some services, such as litigation, that have to be done at hourly rates. If that’s the case, then ask for an estimate upfront and demand regular updates on hours worked and how far the case has progressed so you have a better idea of what your costs are going to be. If a firm won’t work with you on cost control, then it’s probably time to look elsewhere.
Laws are the rules that govern the game of business. While it can be expensive to make sure you are playing by the rules upfront, it can be even more expensive if you find out that you made mistakes later on. As the old saying goes, an ounce of prevention is worth a pound of cure.
FRED KOURY is president and CEO of Smart Business Network Inc. Reach him with your comments at (800) 988-4726 or email@example.com.
If you stop for a moment to think about all of the risks your business is potentially exposed to, the list can be mind-boggling. A customer could not pay you for a large order. Your building could burn down. An employee could be involved in an accident resulting in a lawsuit. Your financial data could be stolen. The list goes on and on.
Because most CEOs prefer to focus on the positives and the growth that goes with it, many areas of risk are often overlooked or ignored. Industry experts will tell you that you need to be reviewing your risk exposure in all areas at least once a year. This should involve a comprehensive look at your entire business and involve all of your top people as well as your insurance agent or some other outside expert who can help guide you through the process.
As CEO, you need to not only ask the right questions to protect the business and those who work for you, you also need to follow up everything in writing to make sure there is a paper trail in the event that something goes wrong.
There are companies out there that market themselves as risk management specialists. Most are reputable and qualified, but some are nothing more than a marketing slogan. Odds are, you probably don’t have a risk management expert in-house. If your agent or broker isn’t interested in helping you with your annual risk review or doesn’t have anything to contribute that might be a sign the person is in over his or her head and you may need to look for a firm with expertise that better matches your needs.
As companies grow, it’s easy to outgrow your experts. Your needs as a midmarket company may be completely different than what you needed as a small company, and the experts who were so vital in the early days of the company may no longer have the expertise you need to go to the next level. It can be hard to make these changes, because a lot of times these experts are also your friends or people you have had a long-standing relationship with. But as CEO, you need to do what’s best for your company. If the friend has the experience and expertise, then great. But if not, you owe it to yourself and your company to find someone who can help you manage the risks that your growing business faces.
Once you find someone, make sure everything you discuss actually makes it into your policy. Have the person show you where in the policy each item is and make sure it reflects a coverage level that you are comfortable with. You should also expect comparisons of what coverage other companies that are similar to yours have so you can see how your package stacks up with the competition. Ask for the pros and cons of getting coverage for each area of risk you face.
There are many areas that you could handle on your own and won’t need to buy coverage. But others will pose so much financial risk that it’s not worth gambling your business just to save a few dollars in the short term.
When all is said and done, send your risk management firm a letter explaining that you are relying on its expertise to guide you through these hazards. This should make it clear that the firm shouldn’t assume you know what you are doing and that you will need its guidance. If something goes wrong, you will have it in writing that the onus was on the firm to provide the proper coverage.
In this economy, there are a lot of things that can go wrong and we’d all like to not think about them. But the CEO’s job is to think through the “what ifs” and make sure the business is protected against all of the risks that are out there.
In these strange economic times, you need to talk to your bank as much as the bank needs to talk to you.
Instability in the banking world is what led to the economic downturn, and while things have stabilized, you still need to be aware of your bank’s status. Is it one of the banks that was mostly unaffected by the crisis, or did it have to take government money to survive?
You need to know because you don’t want to be taken by surprise.
In the old days, it was the banks asking all the questions. They wanted to know about you and your business to determine whether you were capable of paying back the money you wanted them to lend to you. Now, they are asking those questions and more about every customer, because they can’t afford any more bad loans. At the same time, you can’t afford to be left high and dry by a bank that suddenly decides to pull your line of credit because someone there decided he or she didn’t like the industry you are in. It’s important to ask as many questions about your bank as the bank asks about you.
This is where trust comes in. Both parties need information to make the relationship work. You need to be honest with the bank so it is not taken by surprise, but the bank also needs to be honest with you about what it can do for you now and in the future.
Ask yourself how much your banker really knows about your business. If he or she has never come out to see you and ask about your operations, you have to wonder how much he or she really cares about the relationship. If your banker isn’t going to try to understand your business, then how will you convince him or her to loan you money when needed? What will the bank base its decisions on if it doesn’t truly understand your company?
If your banker has invested some time in you, then you should invest some time in him or her, as well. Review the products and services you use with the bank and see if there are better options that might be available. Are you paying for services you aren’t really using? Are there ways the bank can help you improve your cash flow?
A good banker wants to be an adviser. If you aren’t getting any advice, you may need another bank.
In these economic conditions, it’s also a good idea to have a backup plan. What if your bank called tomorrow and said that it had to eliminate your line of credit? Could you survive?
Develop secondary relationships, both with other decision-makers in your current bank and with decision-makers in other banks. This way, if your current banker leaves or is downsized, there is already someone in place either there or somewhere else who is familiar with your business.
In today’s world, you can’t afford to be surprised by anything, let alone a sudden decision by your bank that’s driven by things outside of your control.
Work the relationship you have with your banker, but make sure you are always aware of what’s going on with your bank, just like it will be aware of what’s going on with you.
If you look through a list of top companies and compare it to a list of high-growth companies, you will usually find one thing in common: a commitment to training and development.
These companies see the way to continued growth through a continual development of their employees. Some focus on the basics of the job, some focus on leadership development, and many organizations do both. The equation is simple: Equip employees with the right skills and knowledge, and they’ll whip the competition. And the level of commitment of some of these companies is staggering.
For example, PricewaterhouseCoopers invested more than $10 million in developing 25 global programs dealing with issues of diversity and inclusion. Wyeth Pharmaceuticals sent 1,800 salespeople through an eight-level “career ladder” that recognizes performance and elective credits from approved coursework. Vanguard invests 34 hours of instruction and 17 hours of on-the-job training for its top performers, touching on topics like the company’s leadership values, coaching others and transition strategies. More than 50 percent of those who go through Vanguard’s training have been promoted to a supervisory role.
How much you spend isn’t as important as what you are committed to accomplishing. Regardless of whether you are a $10 million company or a $2 billion company, the same principles apply.
While many CEOs can see the potential of training, they hesitate because of the unknown. What will the return on investment be? How do you measure how much more effective your employees will be? Those are tough questions to answer, especially in an economy where every penny counts.
But if you want to be one of the best companies, you are going to have to take the long-term view and make the commitment. If you work closely with your managers and staff to make sure you are training on the right topics, the benefit will come. You will give employees the skill sets they need to succeed, they will take ownership of projects, and they are more likely to build a long-term commitment with you.
Not every training program has to cost millions. If you work with your local university and community college, you’ll find there are a lot of affordable programs that can meet your needs. Many offer online modules that can be completed at any time, minimizing disruptions among employees. Others offer pre-class and post-class assessments so you can see how much employees learned in the session.
No matter what type of training you choose to pursue, make sure you are completely committed to it. Don’t do it just so you can add a training overview to your company description on your Web site or as a means of enticing job seekers. If you are going to invest in people, then you need to believe in it to make the program work.
Once you are committed, make sure you maximize your return. Survey employees to find out what they are interested in learning about and what they thought of completed training sessions. That information can help you create some initial plans or refine the ones you already have. Training is most effective when all parties involved — employer, trainer and employees — are all committed to the end goals.
In a time when many companies are cutting back, a lot of midsized companies are eliminating training and development programs as an easy way to boost the bottom line. But if you are cutting back, some of your competitors are not. When the economy turns around, they will have a better-trained and more committed work force to take advantage of new opportunities.
The question to ask yourself isn’t, “Should I cut training?” The question should be, “Can I afford not to invest in my people?”