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Broad Option Distribution? No Debate – the Answer is Yes!

Nate Lentz
September 11, 2019

There is a debate that often happens among investors, management, and other board members about the value of options for non-executive employees in start-ups.  Sometimes investors worry about the dilutive effect and ask the question.  Other times it is founders who see the impact of additional refreshes of the option pool on their ownership.  I think there is only one correct answer to this debate and that is to give options to every employee.

Last year I was giving a town-hall type of talk to one of our portfolio company’s assembled team and I was discussing the benefits of growth on business value and employee opportunity for personal growth.  Someone in the crowd raised their hand to ask a question.  Why was growth important to employees who were primarily compensated with salary.  Aggressive growth targets, they pointed out, were often missed which impacted cash bonuses, and most of the employees did not have options.  Weren’t these employees better off with modest, achievable growth and better company stability?  Great question.  I went from that town-hall meeting into a scheduled board meeting, and by the end of the meeting we had agreed to put in place a plan to roll out options to all employees.  Revenue growth is a driver of value, yet most employees had previously had no major incentive to get behind an aggressive growth plan.

I have heard the argument that small option grants have little impact on the non-executive employee.  The perspective is focused on how large an exit would have to be for these options to “really be worth something,” which usually means a minimum of a million dollars.  In truth, for many of these employees, “really worth something” is defined as an order of magnitude or more below this million dollar target.  Osage Venture Partners has had three meaningful exits this year where many option holders saw real value.  In one of these exits, the average employee who had salaries of less than $100k, most of whom were young and in their first or second job, had a payout from options that exceeded 50% of their salary.  The impact of these payments on the younger members of the workforce is real.  Houses are being bought, school debts are being repaid, and college savings plans are being funded.  It is exciting to have been an investor in a business which had such an impact on so many people.  This was not an anomaly of a billion dollar exit and the data would have been similar at each of the three companies we exited this year.

We look forward to seeing many more great exits and many more people having life changing financial outcomes.  These outcomes are what makes people want to work at start-ups.  Everyone knows the founders do well, but so do many other people.  If Osage Venture Partners is a future investor in your start-up or if we are a co-investor with you and are on a board of directors with you in the future, expect us to push hard for company-wide option distribution.  It pays off in so many ways through motivating a team, recruiting talent, and in building a culture, all of which drive value.  Personally, I also get a lift from looking at the option payoff schedule and thinking about how lives and futures are getting impacted.