“Would you mind telling me your stock option plan at Maxim?” Carlos, the VP HR at Micrel asked me. “I want to do some benchmarking.” I had just joined the company as General Manager of one of three divisions the company had, so I was glad to help.
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I walked Carlos through the grants I received every year I was at Maxim. There were 11 years of stock option grants. After I finished telling Carlos the grants I received, he said to me, “Is this really true?”
“Yes, it is,” I said.
“That’s very generous,” Carlos said to me.
“Well, I’m hoping Micrel will be equally generous with granting options,” I said.
Carlos was dead silent.
I had a lot of issues I needed to solve at that point in time because the division I inherited was a complete disaster. Fighting for stock options for my team, quite frankly, was not at the top of my list of issues.
If you want to retain your team, then you’ll grant them generous amounts of stock options.
As I said, I had of issues I had to deal with to get this division turned around. Morale sucked. The product strategy was a disaster. The marketing strategy was even worse.
The good news was these issues were easy to fix. Once I got my bearings, I was able to focus on the personnel issues the division had.
It was clear to me that most of the people I inherited would have to go. But there were some people were keepers.
There was Steve who I had worked with previously at Maxim. Steve was someone who had done great work previously with me, and I knew I could count on him.
I wanted to promote Steve from manager to director. I told Carlos I wanted to increase Steve’s options.
“We have an evergreen plan,” Carlos said to me.
“That’s great,” I said. “How can we make it work for Steve?”
“Here’s how it works,” he said. “We look at the percentage ownership of each employee for the level they are at. For Steve, he should be getting 500 shares a year at his new level after his initial grant expires.”
“What was Steve’s initial grant?” I asked Carlos.
“It was 2,500 shares per year for four years.”
I started laughing. “And you think this is a good deal?”
“It’s a great deal,” Carlos repeated. “He’s getting a larger percentage ownership than he would at Maxim.”
You need to understand that dilution is a good thing, not a bad thing.
“Who cares!” I said, raising my voice. “Maxim and Micrel are public companies. Maxim is 10 times the size of Micrel. Percentage ownership is irrelevant. It’s the value of the stock that matters!”
Carlos just stared at me, dumbfounded.
“He’s (Steve) gonna leave,” I said. “Let me ask you this. How long does the average employee stay at Micrel?”
“Four years,” Carlos answered quickly.
“I wonder why?” I said sarcastically. “You don’t think there’s a correlation between employee’s stock falling off a cliff and when they leave?”
“He (the CEO) won’t change how he does things,” Carlos answered. “He thinks this is a great deal for employees.”
“He’s a fool,” I said. “There’s no financial incentive to stick around here.
“Do you want to know how long employees stick around at Maxim?” Before Carlos could answer, I answered for him. “The average employee works at Maxim for at least ten years!”
Again Carlos looked dumbfounded.
“I told you this when I joined the company! Here’s the difference between what a Maxim employee and a Micrel employee would get!” Then I drew something like this:
“That can’t be true!” Carlos said.
I sighed very deeply, and I tried to calm myself down. I stood up, and I said as softly as I could. “Carlos, I want Micrel to win. If you guys don’t want to face reality, that’s your problem. But I guarantee you the reason employees are leaving after four years is because there’s no financial incentive to stay.”
Then I walked out of Carlos’ office.
I mentally prepared myself that I would be losing my team after four years. And I realized that I wouldn’t likely be at Micrel for more than four years either.
You either get it or you don’t get it regarding stock options.
I’ve never met him, but ex-Benchmark Capital founder, Andy Rachleff, seems like a pretty smart person to me. He noticed a common thread amongst his successful startup portfolio companies.
Rachleff noticed the startups that had a generous evergreen plan increased employee retention from an average of 2 to 3 years to significantly longer. Rachleff wrote:
“Offering a transparent, consistent and fair program of equity grants that employees can build into their long-term expectations. As a result, not only do you avoid cliffs, but you also tie both long-term tenure and contribution to their ownership stake. The best part is that, as your company grows, you always grant stock in proportion to what is fair today rather than in proportion to their original grant.” Andy Rachleff
Rachleff’s experience with a large number of startup portfolio companies matches my Maxim experience. Stock options matter. And, if you’re an evolved CEO, then you realize the tremendous power a well thought out stock option plan can have.
Maxim was not an easy place to work at. The expectations were sky-high, and Gifford, Maxim’s CEO, was no shrinking violet. He was tough to please.
One of Gifford’s favorite sayings was, “Everyone is motivated by fear and greed.” From personal experience, I know Gifford certainly understood how to put the fear of god into you.
However, Gifford equally understood why it was important for everyone to share in the company’s success. The evergreen program Maxim had (similar to Rachleff’s portfolio companies) kept his team in place.
Compare that to a similar company, Micrel, that didn’t have a generous evergreen program. The team left as soon as their options expired.
The choice is yours which type of company, and stock option plan, you want to have.
For more, read: What Are The 5 Rules You Need To Divide Founder Equity?