What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Employee Stock Options & Succession Planning

Original post by Justin Johnson of Demand Media

Many businesses are owned by people who do not have family members who are interested in running the company after the owner can no longer operate it. Employee stock options and succession planning are important topics that business owners should discuss when the appropriate time arises.

Contents

What are Employee Stock Options?

Employee stock options refer to the practice of allowing employees to purchase a predetermined number of shares of stock at a fixed price at a time in the future. Typically, the employee stock option contract explicitly states the period of time in which the stock options may be exercised. The employee stock option contract allows the employee to purchase shares of stock at a set price, regardless of the market price. Issuing employee stock options is a popular way to retain or attract successful workers.

What is Succession Planning?

Succession planning refers to the process that unfolds when the current management of a company steps down and leadership is transitioned to another manager or management team. It is essential to have a thorough and detailed succession plan, as the environment in the company is often confusing and harried during this time of transition.

Stock Options & Succession Planning

Offering stock options to key figures in the company can be an effective form of succession planning. In a scenario where stock options are to be used in the succession process, the owner of the company would offer the key people the option to purchase company stock at a pre-defined price within a set time period. Once these options are exercised and the majority or all of the company stock is owned by the group of key people, the company has effectively transitioned to new ownership.

Why Stock Options are an Effective Form of Succession Planning

Stock options are an effective means of succession planning because it allows the company to be operated by people who are familiar with the business and who are emotionally and financially invested in the firm. When an option is granted, the people who will exercise the option have a stake in the viability and continued profitability of the business. It is essential to grant stock options to people who are mature and wise enough to operate the company in a responsible manner.


                   

References

About the Author

Based in Somerset, Ohio, Justin Johnson has been writing since 1998. He was a finalist for the 1998 Muskingum County (Ohio) Bar Association Law Day Essay Contest and has also written academic papers on business, finance and political topics. He has a Bachelor of Science in business management from Pensacola Christian College.


Advertisement