NEWSLETTER-2017

42 NEWSLETTER 2017 increased about ten-fold. While options are the most prominent form of individual equity compensation, restricted stock, phantom stock, and stock appreciation rights have grown in popularity, and are worth considering, as well. The dilutive effect of options, even when granted to most em- ployees, is typically very small, and can be offset by their potential productivity and employee retention benefits. Options are not, how- ever, a mechanism for existing owners to sell shares, and are usually inappropriate for companies whose future growth is uncertain. They can also be less appealing in small, closely held companies that do not want to go public or be sold because they may find it difficult to create a market for the shares. Downsides of SOPs Although there are dozens of advantages of SOPs, the downsides of SOPs should also be noted. In this context, most often the employ- ees have to pay cash to exercise the SOPs. At the time of exercising SOPs, a tax may be incurred depending on the jurisdiction and type of the SOPs. When you exercise the SOPs, you will receive stock that will not be easily saleable if the company is still privately held or is subject to substantial transfer restrictions. The value of the stock could go below the exercise price you have paid for the stock, and for this reason, many option holders wait until a liquidity event to exercise options. The main disadvantage of SOPs for a company is the possible dilution of other shareholders’ equity when the employees exercise their stock options. From the point of view of the employees, the main disadvantage of SOPs in a private company, compared to bonuses or higher compensation amounts, is the lack of liquidity. Unless the company creates a public market for its stock or is acquired, the SOPs will not be the equivalent of cash benefits. And, if the company does not grow, and its stock does not become more valuable, the options may ultimately prove worthless.