One of the essential ideas of the company is a sweat equity plan by which people get an ownership interest in lieu of salary during the startup. Stock option plans are now a very attractive way of handling this.
Basically, the company issues options which can be exercised in the future at a fixed price. To qualify for tax breaks, this price will be 110% of the fair market value when the options are issued. What we hope is that the stock will become extremely valuable so that you can exercise your option at the cheap price, sell for a high price, and pay capital gains tax on the difference (plus straight income tax on the option price).
The tax laws force a few conditions on the price and expiration period of the options, but these should not be troublesome. Within these conditions we have a great deal of freedom in specifying the terms of the options. We'll circulate more detailed information on qualified stock option plans later, when we've consulted officially with the experts.
The Organization Plan includes an outline of a stock option plan. We ought to get a pretty firm agreement on details during the Sunday meeting, since this is such an important part of the whole plan.
Unpleasant question: What if someone does no work at all? In the extreme case he can be fired, forfeiting any options he has, but retaining any stock. In lesser cases he gets a severely truncated option.
Next unpleasant question: How is it determined who has been working enough? This has to be subjective; it can't be a matter of lines of code generated, divided by bug reports. The subjective judgement should follow easily from the experience of answering the phone and telling customers which products aren't ready yet. Inevitable differences in productivity are handled by bonuses for brilliant work and by not having duds among the founders.
Editor: John Walker