Stock option grants startup
This article is part 1 of our series on the basics of startup stock options. Follow us on Twitter cartainc for more educational content. Imagine you just got a job offer from a new startup called Meetly. Like most offer letters, it does not tell you what stock options are, what to do with these options, what kind of options you get, or how much they are worth. There are four basic things you should understand to properly evaluate your offer. Because your purchase price stays the same, if the value of the stock goes up, you could make money on the difference.
Equity 101 Part 1: Startup employee stock options
For this reason, you should approach administering a stock option plan with a high degree of care. Wrongly administered, you might become subject to SEC or state regulatory action. A financing could be delayed. Or an exit transaction could be put on hold. When you hire a new employee, you will frequently include language in the offer letter about the expected option grant.
When optionees leave, their options revert to the stock option plan if not exercised. Be sure to update your stock option ledger when this occurs. Skip to content. Stock option plan administration requires regular attention to compliance obligations. Events to Watch Out For There is work to do when: the board of directors approves stock option grants or stock awards , which can occur either at regularly scheduled board meetings or at any time at special board meetings or actions by unanimous written consent; optionees exercise their stock options, or have questions about how their options work; optionees leave the service of the company; and the company is fulfilling its tax reporting obligations.
Order of Optionee Paperwork When you hire a new employee, you will frequently include language in the offer letter about the expected option grant.
Do you have any optionees located in states in which you might need to make a filing with the securities regulator in order to grant options in that state? Some states require filings and the payment of fees to grant options to an optionee resident in that state e. Because each state is different, you need to be careful whenever granting options to any optionee located outside of your home state where you presumably have already done the compliance work to grant options to optionees living in that state.
We maintain a 50 state guide to assist in this process. Do you have enough shares authorized and available for use in your plan? Increases in plan share reserves or the adoption of a new plan will likely involve stockholder approval as well as board approval. Make sure you are updating your stock ledger cap table. Remember, Rule has absolute mathematical limitations that you cannot go over. There are three different measurements, and you only have to comply with one of them, but companies can easily surpass the limits if they are not paying attention to this issue.
A prospectus must contain certain enhanced disclosures, risk factors, and financial statements. Have you determined the current fair market value of the stock? Are the options being granted at no less than that fair market value? Are you in the A waiting period, when you cannot grant options until the A valuation is complete?
Go back and make sure that you have a set of board minutes or board consent granting the options this should be easy to find, and arguably this step is unnecessary because you should have made sure that every option grant was approved by the Board before you gave the optionee the paperwork, but it is always a good idea to go back and check the records to ensure that they are in order. If the option is an incentive stock option, prep the employee on the alternative minimum tax consequences.
If the option is a nonqualified stock option granted to an employee, and it is being exercised at a gain, calculate the income and employment tax withholding amounts the employee must pay to the employer to exercise the options. Your withholding obligation exists if the optionee was an employee at the time of grant, regardless of whether the employee is or is not an employee at the time of exercise.
See this blog post for more details. By January 31st, deliver Form to employees who exercised incentive stock options during the prior year. If you file electronically, the due date is March 31 of the year following the year of exercise of the incentive stock options.
Stock options aren't actual shares of stock—they're the right to buy a set number of company shares at a fixed price, usually called a grant price. The technology half-life is incredibly short, yet stock options have remained a central compensation model for startups long past true usefulness. It's time to dump.
The power of startup equity is almost a myth in and of itself, with swirling stories of unicorns and overnight millionaires. In truth, startup equity is often misunderstood, misinterpreted, and sometimes founders granting startup equity are misinformed. The real problem with that…. Misinformation is costing you, a lot. Which is why we rounded up the biggest myths holding back entrepreneurs who are using startup equity, whether that equity is for stock option grants, fundraising, or building their own upside.
No pilot flies alone and every plane needs a crew.
There are a variety of forms that equity compensation can take, but the two most prevalent in the startup environment when the startup is a corporation are restricted stock and stock options. Many new entrepreneurs are familiar with these general concepts, but are not sure which is appropriate to issue to their employees, consultants and advisors. What follows is a high-level summary of restricted stock, stock options and the differences between the two to aid founders in understanding which is more appropriate for their team members.
Equity Compensation: When Startups Should Grant Restricted Stock, ISOs, NSOs, or RSUs
Today, venture capital growth funds are now giving startups the cash they would have received at an IPO. This has moved the need for an IPO out another five years, allowing VCs to capture the increase in market cap in the company. And the market cap at IPO time will exceed anything yet seen for startups. Stock options with four-year vesting period are no longer a good match for employees when it may take 10 to 12 years for the company to go public or be acquired. VCs need to consider a new stock incentive model: Restricted Stock Agreements for the first key hires and then Restricted Stock Units for everyone else. When a group of engineers launched Fairchild Semiconductors—the first chip startup in Silicon Valley—in , investors offered the founders a relatively new type of compensation: stock options.
Rewarding Talent
In a private company setting, after the founders have been issued fully vested or restricted stock under their stock purchase agreements, the employees, consultants, advisors and directors who are subsequently hired commonly receive equity compensation through stock options. There are a number of reasons for this, including ease of administration, macro- and micro-market norms and a desire to minimize the capital commitment for the individuals who are to receive equity awards. Consistency is also important, as it helps avoid separate negotiations with each individual on the nature and terms of equity grants. Founders find this best accomplished by sticking to an "everyone gets stock options" principle, so that the only negotiation is about how many shares are covered by the stock option grant and what the vesting schedule should be. An exception to the "stock options only" principle sometimes occurs during negotiations to attract and hire an experienced senior executive who may request restricted stock, but even then the benefits of an "everyone having the same" form of equity may prevail. In this article, we provide an overview of some of the key considerations in making stock option grants: who gets an option, the size of the option, vesting terms and pricing. After the formation of a startup and prior to any significant financing, companies should and often do consider establishing a pool for providing equity grants to initial employees, consultants, advisors and directors. For example, if the founders hold 9 million shares, a pool of 1 million shares might be set aside for equity grants, including stock options, to be made between formation and the anticipated time of a first financing.
Gunderson Dettmer , a Silicon Valley-based law firm that primarily represents venture-backed technology startups and emerging companies, has a. We spoke recently to Ward Breeze , a partner who advises companies and investors on corporate and securities matters, and Lisa Gorrin , a partner.
For this reason, you should approach administering a stock option plan with a high degree of care. Wrongly administered, you might become subject to SEC or state regulatory action.
How to Make Startup Stock Options a Better Deal for Employees
We were born in Europe more than 20 years ago, and today we have feet firmly planted on both sides of the Atlantic. From our hubs in London and San Francisco, we use our deep knowledge to invest in outstanding startups. We have companies in our portfolio, equally split between Europe and the US. We adapt and apply best practices from Silicon Valley to our startups in Europe, to prime them for success. One of the key ingredients is employee ownership. The result is that these startups have the people they need to succeed early on. In Europe, employee ownership is less common — and there has been no clear playbook for startups to follow. This is exacerbated by the complexities of doing business on a continent made up of 30 different countries, all with different cultural norms, regulations, tax incentives, and so on. This handbook is designed to help European founders make critical decisions. Who do you offer stock options to?
Employee stock options: A compensation strategy for your startup
Stock options can be wondrous things. They can also be smoke and mirrors, or a pea under a whole bunch of walnut shells. That included some people who were very low on the pay scale but had been given options early. And a late addition, a week later: Oh no, I forgot to discuss vesting. Stock options are normally vested over a period of time, rather than given all at once. Options are not really yours until they are vested. For example, options might be vested over two years. Vesting makes a big difference. Follow him on Twitter Timberry. Ownership Shares and Your Business Plan.
