Question: We are a private company that gives stock options to employees. How can I best engage employees in seeing its potential value?

I am the president of a private company. We are doing well, growing earnings and value, but there is no market for our stock. We anticipate being able to offer dividends and buybacks in the future.

For now, what are some ways to get employees excited about ownership when they can't do anything with it.

3 Expert Insights

Sounds like you have good intentions. However, the fact that your employees have no way to exercise those options may in fact be leaving them frustrated rather than motivated. They could argue - in their minds - that you will never "share" the value, yet you enjoy appearing  "generous".

The way around this is to set a timetable and to communicate same to those employees you have given options to. They need to know when the options can be converted/vested into shares and at what price.

If the aim is to retain key employees then each batch of options should not be convertible till after say 3 years from being issued.

You should also let them know how many shares are outstanding or will be, and how you will calculate their price; say X times average earnings per share over the past Y years. You should also institute an "internal market" for your shares so that you or other employees can buy them should they need cash.

Stock options in private companies often have negative consequences.  Unless there is a commitment by management and the majority equity  holders designed to achieve high, rapid growth resulting in a near term sale or IPO, options, warrants or other equity instruments can be serious problems.

Already noted, the inability to monetize the "award" is a drain on morale rather than a motivator, regardless of the value you attribute to the stock.  Further, minority shareholders can become a legal burden if there is disparate treatment compared to the majority holdings.

Many studies have shown that incentives which can be realized only in the long term are poorly received. If the benefits of  equity sharing are your objective, there are other proven models. But the benefits must be realizable at least annually if not more frequently.

Examples:  Issuance of phantom stock, non-voting (or otherwise qualified stock) grants earned on a vesting schedule but when earned represent a realizable financial gain i.e. which pay dividends based upon stated financial metrics or if an LLC or S corp, grants that can be structured to provide the basis for future tax benefits.

Until equity awards are meaningful,  I recommend annual plans (profit sharing, performance bonuses) that result in focus on the objectives agreed upon in the current business plan. A distribution of any future windfall equity transaction can always be made.

Previous answers to your inquiry all make possible and valid points. My experience reveals something quite basic.

Many companies do not do a good job of building a sense of value of what their employee base is going to or has earned. Often times we are not talking about sophisticated investors who have much or any experience in dealing in stocks. They are earning what you offer because they have achieved certain benchmarks that make them qualified for this benefit. Thus, they are receiving something about which they have little, if any, knowledge, experience or appreciation.

Such individuals can't be expected to place a value on it. Regardless of what they are able to do with the earned shares at this moment, they do need to develop an appreciation for what this can mean 'down the road'. This is relatively easy to accomplish and just something that is too often overlooked. I see this as a form of an internal PR campaign.