Question

Suppose you decide (as did Steve Jobs and Mark Zuckerberg) to start a company. Your product is a software platform that integrates a wide range of media devices, including laptop computers, desktop computers, digital video recorders, and cell phones. Your initial market is the student body at your university. Once you have established your company and set up procedures for operating it, you plan to expand to other colleges in the area and eventually to go nationwide. At some point, hopefully sooner rather than later, you plan to go public with an IPO and then to buy a yacht and take off for the South Pacific to indulge in your passion for underwater photography. With these issues in mind, you need to answer for yourself, and potential investors, the following questions.

1. What characteristics of the board of directors usually lead to effective corporate governance?

2. List three provisions in the corporate charter that affect takeovers.

3. Briefly describe the use of stock options in a compensation plan. What are some potential problems with stock options as a form of compensation?

Answer 1

Characteristics of board of directors which lead to effective coporate governance are that the board is efficient, allows a respectful conflict of ideas, is simple, is focused, is integrated and synergistic, has good outcomes, preserves community assets, and leads to enjoyment and personal reward for the individual board members.

Three provisions in corporate charter that affect takeovers Targeted shareholder repurchases, Shareholder rights provisions and Restricted voter rights plan.

Stock options are a form of compensation. Companies can grant them to employees, contractors, consultants and investors. These options, which are contracts, give an employee the right to buy or exercise a set number of shares of the company stock at a pre-set price, also known as the grant price. This offer doesn’t last forever, though. You have a set amount of time to exercise your options before they expire. Your employer might also require that you exercise your options within a period of time after leaving the company.

Problems are

1.  The tax implications for employees can be complicated.

2. Dilution can be very costly to shareholder over the long run.

3. Stock options are difficult to value and An individual employee must rely on the collective output their co-workers and management in order to receive a bonus.