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Home > Stock Options > Articles Online >
New data provided to us at the NCEO by Advanced-HR, Inc., a Saratoga, CA firm that provides detailed data on salaries and equity participation, finds that the widespread use of broad-based options continues to be very popular. Advanced-HR provides a product called OptionImpactTM that allows corporate (rather than consumer) users to performed detailed, position-by-position comparisons of their compensation strategies with similar companies. Its data currently cover only venture-backed closely held companies, although it plans to expand to public companies as well. We were given access to these data to provide a broad overview.
The data set includes 275 companies, almost all of which are in the computer, e-commerce, and communications industries. Companies are in various stages of development, having completed one or more rounds of venture financing. Most are on the West Coast, but the data set includes companies from all over the country. Employment is primarily in the 20 to 100 employee range, but about 20% of the companies have more than 100 employees. Most of the data is from within the last six months, but about 40% is between nine and 12 months old. Even the oldest data, however, reflects practices well after the value of technology stocks had sharply declined in 2000.
Of 275 companies reporting data, 77% said they provide options to all employees, while 23% provide them only to select employees or groups. There is little variation in these numbers from industry to industry. Only the software group, with 61% of the companies providing broad-based options, deviates from the mean by an amount not likely to be caused by random variation. Similarly, neither the size of the company nor the amount of capital raised are related to the propensity to offer options broadly.
This is a very important finding in light of recent press stories suggesting that the love affair with options is fading. The practice of granting options broadly in venture-backed closely held companies goes back to the 1980s and has survived ups and downs in the market. It is clearly now an institutionalized part of compensation. Although these companies only represent a very small fraction of the 10 million employees we estimate now receive options, most of whom actually work for large public companies in non-technology industries, these venture-backed companies have a much more dramatic impact on technological innovation and corporate culture than their numbers alone suggest. Among their ranks, after all, are the next Microsofts and Intels.
Another finding contrary to popular belief is that most of the companies -- 82% in this sample -- provide incentive options rather than non-qualified options. A comparable group in the NCEO's Current Practices in Stock Option Plan Design study reported that 62% provide only ISOs. Both findings point to the fact that companies at this stage of development generally are not concerned about the tax deductions nonqualified options can provide and thus let their employees benefit from the potential tax advantages of ISOs.
Finally, the data show that 21% of the companies use annual grants in addition to new hire grants, 68.5% provide additional grants as needed, and only 10% provide no follow-on grants.
The data allow for detailed analyses for dozens of job titles. Our focus here is on the distribution of options to broadly defined non-management groups. It is important to put these numbers in context. Some of the reporting companies are in a very early stage of development; others have received one, two, or more rounds of financing. Additional rounds of financing increase the number of outstanding shares, thus diluting the equity position of stock and stock option holders in percentage terms while normally making their stock more valuable. It is also important to note that in these companies, the stock price at grant is a relatively minor matter because it is usually quite low relative to what it will be if the company is sold or goes public. The number of shares is more critical. An employee with an option on 5,000 shares at $1 is not materially worse off than one with an option on 5,000 shares at $3 if the IPO price is $12. The spread on their options in either case makes the acquisition cost relatively less significant ($5,000 or $15,000, compared to a value at exercise of $60,000). The number of shares for which the option is granted, however, is much more important.
The table below summarizes the findings for various groups:
Stock Option Distribution by Non-Management Job Category* |
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| Mean Number of Options | Mean % of Total Equity** | ||
| Assembler | 1,200 | .006 | |
| Administrative assistant | 2,500 | .006 | |
| Human resources | 2,666 | .004 | |
| Technical service | 2,850 | .017 | |
| Software engineer | 10,000 | .042 | |
| *These include people from entry level to mid-level. Due to the averaging across a broad range this involves, as well as the unavailability (to us) of information about company development and capitalization structures, this information cannot be used to determine competitive stock option grants for specific positions. At different stages, companies will have different numbers of shares, making the percentage of equity measure only the broadest gauge, not a means to make specific comparisons. | |||
| **Because different companies have different job mixes, along with different capitalization structures, the percentage of equity cannot be directly compared from one category to another. "Equity" here includes all fully diluted equity, including options, common and preferred stock, warrants, etc. | |||
It is important to note that many of these companies are very young and that employees will often get additional option grants before sale or an IPO. If a company goes public at a typical IPO price of $10 to $20 per share, that would suggest that these everyday employees could be looking at tens of thousands of dollars in option value. Of course, most will not succeed in going public but will be acquired or fail. Acquisition prices would vary widely.
The data here are very similar to what the NCEO found in its Current Practices study for similar companies. Because these companies vary so widely in terms of stage of development, equity structure, and compensation practices, the results in both studies should be seen as suggestive of the general range within which options fall in these companies, not precise comparison points. Nonetheless, both studies clearly show that for most non-management employees, a few anecdotes to the contrary, options are not a road to great wealth. On the other hand, there is no persuasive evidence that employees at this level get paid less than what they would get paid in similar jobs that do not offer options, and what evidence there is points in the other direction. For most employees, therefore, options provide a potentially valuable additional benefit with little or no risk other than that created by poor employee planning for option exercise and taxation.
For more information about Advanced-HR, Inc., and OptionImpactTM, go to Advanced-HR.com. We appreciate their allowing us to use these data.
Copyright © 2002 by The National Center for Employee Ownership (NCEO) (phone 510/208-1300; email nceo@nceo.org; WWW http://www.nceo.org/). All rights reserved.
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