The Stock Option Plan (now often called an Equity Incentive Plan) is what enables you to share in your start-up’s eventual upside with contractors, employees, even members of your Board of Directors.

Just as the upside is not guaranteed, neither is the exit which enables your people to share in it. Unless your start-up is going to achieve a FaceBook or Tesla level of success, the gain in options will only be realized when your company is acquired or experiences an initial Public Offering, or IPO. Long odds.

In some ways, those are the same odds that you founders face, and to that extent you are all in the same boat.

Even though the return on options is far from assured, tradition says that an early stage start-up conserves cash by granting employees and others options instead of full salaries.

Here are the basic steps in implementing an Option Plan.

(i) First, the existing shareholders need to consent to and approve the Plan, and in particular the number of shares that will be in the initial option pool. The shareholders need to be onboard, because the Plan “uses” the corporation’s shares into which the options may be exercised. In other words, because it dilutes the shareholders. It is a good idea to adopt the Plan before much time passes, because only the Founders are shareholders early
In the corporation’s life. As more people become shareholders, more people need to agree to the Plan.

(ii) The Equity Incentive Plan itself is prepared in accordance with the shareholders’ wishes. For the price that i am offering, it will not have all the bells and whistles that big law firms include. Rarely used, they offer little benefit to the Corporation. The Plan will enable grants of options and stock purchase rights.

(iii) The Board too approves the Plan, and grants options in accordance with it. This package includes a Board consent to the grant of options to up to five people, which will serve as a model for future grants. All grants are made by the Board during the early stages of a Corporation’s life. The key action taken by the Board here is valuing the corporation, because the exercise price of the options must be based on an accurate valuation.

(iv) A form of Option Agreement will be prepared, and tailored to the initial grants. We will collectively decide on vesting schedules and the like. These agreements are themselves somewhat complex, because they include documents to be signed upon exercise of the options.

(v) A simple form of option tracker will be prepared. As the number of grantees increases over time, keeping track of how many options are outstanding involves keeping track of both new grants and retired options. Options are retired when their grantee terminates service for the Corporation.

(vi) Follow-on administrative work, like a State Blue sky filing covering the shares in the Plan.