How much does implementing an employee stock option plan typically cost the company (legal fees, admin. costs, etc.)? My company has three principals and five employees and we'd like to being offering equity incentives to key employees. I've heard estimates of $10k-$15k just to get the stock option program up and running, but I have no idea whether this amount is accurate. It doesn't seem like it should be that complicated. Basically, I'm trying to figure out whether or not I'm getting ripped off.

Thanks for any advice you can lend.

Another way to think about it is in terms of value provided (somewhat like warrant coverage). See the post ” What should the terms of bridge loan warrant coverage be?”

Perhaps even a different way to benchmark the size of option grant is to look at assumed in the money value and grant enough shares to provide the implied value. For most companies, there will be a difference between preferred stock FMV and common FMV. If there Series A is $1.00/share and the common FMV is $0.10/share, then each share has an implied $0.90/share spread. If the company wanted to provide $9000 of value, it would grant options to purchase 10,000 shares.

Generally, consultant options will be exercisable for a period between 5 and 10 years. They might be fully-vested upon grant (upon completion of services) and not dependent on continuous status as a service provider in order to be exercised. However, some may be subject to continued services in order to be exercisable.

An option grant is not a do it yourself exercise. There are various things that can be screwed up ranging from 409A compliance, securities law issues, failure to obtain valid approvals which may result in option backdating, etc.

When a consultant (or a law firm) agrees to work in exchange for options in a client, how do you determine the number of options you receive as a fee? For example, if you provide $100K in legal or other advice, what are the typical option terms assuming the company is worth say $5MM post-money after the last round? Duration? Any good option agreements online?

Thanks much.

I have heard of many situations where the auditors are rejecting 409A valuations. At the end of the day, I think that the company needs to appease the auditors with an acceptable FAS 123R valuation for accounting purposes, but that does not necessarily create an issue with the IRS as long as a 409A-compliant valuation backs up the option exercise price. Companies used to take cheap stock charges in connection with IPOs, which tacitly admits that the option price was too low. However, as far as I know, the IRS has not taken the position that these option grants with exercise prices that were too low are no longer ISOs (which need to be granted at FMV).