By Richard Harroch In: Stock Option Plans are an extremely popular method of attracting, motivating, and retaining employees, especially when the company is unable to pay high salaries.

A Stock Option Plan gives the company the flexibility to award stock options to employees, officers, directors, advisors, and consultants, allowing these people to buy stock in the company when they exercise the option. In fact, Stock Option Plans can actually contribute capital to a company as employees pay the exercise price for their options.

For employees, the main disadvantage of stock options in a private company—compared to cash bonuses or greater compensation—is the lack of liquidity. Until the company creates a public market for its stock or is acquired, the options will not be the equivalent of cash benefits. And, if the company does not grow bigger and its stock does not become more valuable, the options may ultimately prove worthless. Thousands of people have become millionaires through stock options, making these options very appealing to employees.

Indeed, Facebook has made many employees into millionaires from stock options. A company needs to address a number of key issues before adopting a Stock Option Plan and issuing options. Generally, the company wants to adopt a plan that gives it maximum flexibility.

Here are some of the important considerations:. Ready to start a business?

Employee Stock Option (ESO)

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Recent Articles You May Like The Top 25 Home-Based Business Ideas Ready to start a business? Expert Profile Richard Harroch Areas of Expertise: Venture Capital, Mergers and Acquisitions, Internet Companies Website: His focus is on investing in Internet and digital media companies, and he was the founder of several Internet companies.

His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness, and AllBusiness.

Tax Topics - Topic Stock Options

Richard is the author of several books on startups and entrepreneurship as well as the co-author of Poker for Dummies and a Wall Street Journal -bestselling book on small business.

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