Originally published in Entrepreneur
By Kurt Piwko
Stock option compensation strategies are hard for small firms and startups to get right even in the best of times given the myriad of rules that apply. The Covid-19 crisis has made it harder, underlining the importance of smart planning around equity-based pay to avoid unexpected tax outcomes for companies and employees.
One problem is the market volatility that has accompanied the pandemic, and the potential for more to come. Depending on where the options were priced when they were issued, this could either result in a lack of incentives for employees because their options are severely “underwater” or an unexpectedly large windfall for them that could hurt current shareholders.
The other complicating factor is the general uncertainty over how key parts of the economy will recover. That’s making it unusually hard to arrive at an accurate valuation, which usually determines the strike price for stock options. Valuations are usually driven by cash flow, which for many firms has evaporated or become highly erratic since March.
This can be especially difficult for tech startups, which rely heavily on stock options to incentivize their staffs when cash is in short supply. Unlike more established firms, they often lack the resources to thoroughly analyze the complex tax and regulatory issues around stock options that could come back to bite them and their employees.
Read the full article in Entrepreneur.