Welcome:‎ > ‎Articles‎ > ‎

Stock Options

I wrote this in December 2011 because I feel strongly that New Zealand high tech growth 

companies are not taking advantage of stock options as a means to incentivize employees, 

attract investment, and indicate to the world that their objective is to build value within their

company that will one day be tradable.

Would you invest in a start-up that does not have an employee stock 

option plan?

Oren Gershstein is describing Israel’s high tech success story to a full auditorium at the 

University of Auckland. The audience is a good sample of Auckland’s high tech start-up 

community: government, university, incubators, funders, start-up owners. They are eager to 

learn how Israel turned from planting orange orchards to being the hottest high tech start-up 

environment on the planet, in less than twenty years. New Zealand wants to emulate that in its 

own appropriate kiwi way. 


Mr Gershstein is tall and thin, with short dark hair, a strong accent, and a focused manner. Even 

in a business suit one imagines he could be a tank commander in the Israeli Defence Force. 

In fact he is an economist, now turned CEO of Van Leer Technology Ventures, one of Israel's 

leading early stage investment centers. He grew up on a kibbutz growing oranges. Now he 

sits on the boards of 24 start-ups, reviews a thousand business plans a year, and is a strong 

proponent of the high tech eco-system that in his words has hit “critical mass” in Israel. 


As he describes a typical company in his programme, where ideas from an entrepreneur 

combine with funding from Van Leer and the Israeli government, he pauses to point out a piece 

of the ownership structure: Employee Stock Option Plans. This, he emphasizes, is the lifeblood 

of the system. Every employee in his companies, whether they be the highest manager or a 

lowly factory worker, gets to share in the company’s financial possibilities through these stock 

option plans. Without this stock option plan, Mr Gershstein says, the incentives aren’t aligned to 

make the business succeed. 


I worked in Silicon Valley for 24 years before returning to New Zealand last August. I have spent 

the last three months talking with the likes of the people in the audience today, comparing what 

they tell me about New Zealand with what I experienced in Silicon Valley. Just as Mr Gershstein 

describes it in Israel, I believe it is the critical mass eco-system in Silicon Valley that drives start- 

up success. New Zealand has the eco-system pieces but so far gaps have prevented us from 

reaching “critical mass”. 


One of the gaps is the lack of employee stock option plans. Very few companies in New 

Zealand have these plans. At first I thought that was due to ownership shortsightedness, and 

employee suspicion and lack of faith. Now I believe it to be a misunderstanding of what these 

plans are, and how they work. 


Very simply, when an employee joins a company with a stock option plan, the employee 

receives stock options. These are not stock, the employees do not take ownership of any part 

of the company at this point. On day one the new employee doesn’t even get the options; the 

transfer of the options (vesting) is done over time. Say an employee is given 960 options in their 

plan on employment, this might mean they vest 240 options after 12 months, and 20 options per 

month thereafter until they get all 960 after 4 years on the job. 


What is an option? It is the right to buy a stock at a certain “strike price”. Say the strike price 

is $100, which represents the stock value on the day the employee joins the company. That 

means that once the stock option vests the employee has the right to buy the stock from the 

company at $100 per share. The employee is not obliged to buy the stock at all....and why 

would they want to do it? They would want to buy the stock at $100 for two reasons: firstly the 

stock has to be tradeable, and secondly the stock has to have risen above $100 in value. Then 

the employee can buy the stock for $100 and immediately sell the stock for more, say $200. 


If the stock never becomes tradeable, or never rises above $100 in value, the employee would 

not exercise the option. In this event the company never gives the employee any stock, and the 

employee never pays the company anything for the option. 


Why are these plans so important? The answer is in the often used name “Incentive Stock 

Options”. They give the employees the same incentive as the owners: to grow the value of the 

company and make it tradeable. That is the whole point. Employees with stock options want 

the value of the company to increase because they will share in that increased value. Company 

owners are not giving away part of the current company, they are giving away a portion of the 

increased value of their company, as an incentive to the people who help create that extra 



Most of the people who have made millions in Silicon Valley didn’t do it because they started a 

company or because they invested early in a hot company. They get rich because they joined a 

company, worked hard, and the company did well enough that their stock options became worth 



This begins to drive the culture within the eco-system. People begin to understand that 

companies depend on them, and that choosing the right company can make a huge difference. 

If a company becomes successful, stock option plans not only reward employees they tend to 

retain those employees and attract others. If the company isn’t working out, employees leave for 

one with better stock option prospects. 


True, it will take more than introducing stock option plans to make our eco-system work. For 

example it would help to have a more fluid and successful stock market than we have in New 

Zealand...but that’s another eco-system gap. 


It also takes New Zealand company owners that understand that sharing a company’s 

prosperity with employees is a good thing because the employees make the company succeed 

more than anything else. It takes owners that believe they would rather own a portion of a big 

company than retain total ownership of a small company. It takes owners who want to build a 

company of value, and want to make that value tradeable, either through a sale or stock market 



When you think about it that way, that an owner who creates an employee stock option plan 

believes employees are critical to making the company successful, wants the company to grow 

well beyond its current value, and wants to eventually sell all or part of it to make that created 

value available to stakeholders, then you can see why investors in high tech companies are 

interested in companies that have stock option plans. 


The first question to Mr Gershstein after his presentation ends is “would you ever invest in a 

start-up that did not have an employee stock option plan?” Mr Gershstein’s answer is firm and 

clear, “No I would not”.