What is a stock option plan and why do you need it?

Mar 21, 2023

What is it?

Call them a share options scheme, an incentive plan, stock options plan, employee stock options, it all comes down to this: it is a way to distribute share options to key people, like employees, advisors, consultants and freelancers. The participants who receive these options can exercise it later at pre-agreed price (known as strike price) and convert their options into shares and own equity in the company.


Why should you implement one?

You might ask why you would want to grant others the option of owing equity in your company. Well, you should consider the bigger picture. With a stock options plan in place, you can:


  • Attract and retain talent.
  • Boost productivity.
  • Improve employee engagement and happiness.
  • Increase overall business value.


When should you set up an options scheme?

You can define the incentive plan early on with your first hirings or you can define that strategy later. The ideal time to set it up might be when you want to:

  • Raise funds: Setting up your scheme before the first funding rounds can become more attractive to investors, as you have that equity pool well-defined, and it shows you have a clear goal in mind.
  • Increase your team: If you have the incentive plan in place, you can use it as a plus to attract new talent.


When will the options turn into real shares?

When you award stock options to participants, they don’t become available to them right away. Instead, the options go through a vesting period and become available over time.

The vesting period can be of two types:

  • Time-based vesting: the allocation of ownership is divided through time (days, month, quarters or years);
  • Performance-based vesting: the allocation of ownership is divided through performance and goals rather than time.


Also, you can add a cliff period. For instance, you grant an employee a five year vesting scheme with a one year cliff. This means that the participant will receive no percentage of the benefit until he reaches that year of employment, at which point he is eligible to receive the options, that will gradually vest over the five year period.


Key takeaways of a Stock Options Plan  

  • Stock Options Plans are offered by companies to their employees, advisors or consultants as equity compensation plans.
  • There’s a difference between options and shares. Options gives the participant the right to buy shares in the future at a pre-agreed price.
  • Share options can be an effective incentive to attract and retain talented employees. They can also motivate your team and boost productivity.
  • Shares don’t become available right away. Instead, the options go through a vesting period and become available over time.
  • There are different types of vesting: time and performance based.
  • The best timing for you to set up your options plan is before a funding round and/or before you hire new employees when you’re about to scale.

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