Question

List the pros and cons of Employee Stock Option Plans. Assess the effectiveness of ESOPs to incentivize key employees and whether or not this would be a viable option for your venture. Provide an example to support your response.

Determine the most likely valuation method a venture capitalist would use to value a fashion boutique. Provide a rationale for your response.

Answer 1

Pros and cons of employee stock option plans are as follows-

PROS-

A. Employee stock option plans can offer a large number of tax advantages.

B. Employee stock option provide both owner and employee benefit because owners get liquidity in their hands where as employee will have a chance to subscribe the shares.

C. It provide with employee a chance of ownership within reach.

CONS-

A. These are highly expensive plans because these are to be offered at discount to current market price.

B. This will drain the resources of the company as it means less cash is available to invest in growing of business.

C. It provides with a legal liability and there is no turning back.

employee stock option plan is a Highly effective plan which helps the employee to subscribe the shares of the company at a lower price and it also helps the company to to issue with the ownership to the employee and have the flexibility of having cash in hands.

venture capitalist would like to value a fashion boutique through free cash flows to the firm because the firm would be prone to shutting down at initial stages of operations and cash flows from operations does not account for insolvency.