Employee stock options

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This blog post explains what stock options are about. It is a very technical topic but for the sake of this post, I am going to keep it really simple and make some over-simplifications. In essence, a stock option is a right given to an employee what is an option grant purchase stock at some point in the future at a set price. When they raise money from investors, they give them a share of the company's stock in exchange for money. Having an option pool is very common for a venture backed startup, and fairly uncommon for most small companies.

At Acquiawhich is a venture backed company, we give our full-time employees stock options on top of a competitive salary. These options come from our option pool. If you are an employee of a startup, stock options are a big deal as you are going to receive stock options as what is an option grant of your compensation.

It is a big deal because it means you have the option to be a shareholder and to share in the gains. It's a big part of the startup culture, and an important reason why top engineers prefer venture backed startups. Those options are taken from the stock option pool that is set aside especially for employees. When the company is founded, the stock is basically worthless.

The founders, the employees and the investors will want to steadily increase the value of the company, and by extension, the value of the company's stock. Granted, the value of the company might not always go up, or it might not go up that fast, but it certainly could. Hundreds of Google employees became millionaires overnight when Google went public. Hundreds of Google employees left to join Facebook what is an option grant not because they get a better salary but to get some of Facebook's pre-IPO stock options.

When a startup is growing and successful, the price will go up over time. At the same time, if the company fails, the employee equity will be worthless. The reason startups use stock options is because it allows them to attract and retain high-quality people at reasonable salaries. Do you want to take the reduced salary and some risk and swing for the fences, or you do you prefer predictability without the potential for a big upside?

My first job out of college I worked for a venture backed startup that granted me two rounds of stock options -- both grants were rendered worthless as the company didn't survive the bubble in Even so, I never regretted the choice to go work for this startup. I still got paid a fair salary, I learned a lot and just loved the start-up culture that we had created. I firmly believe there is an entrepreneur tucked away in many of the best people. For those people, the daily satisfaction of working with high-quality colleagues in a fast-growing company, and the ability to share in the company's success as a shareholder, is worth a lot more than a bigger salary and predictability.

I knew that was true for me when I was 21, and I know it is still true now what is an option grant I'm I have just been offered stock options in a start up and reading this makes me feel a lot better about the proposal.

The only other majour issue for me than you never touched on was what risk am I now open to? It's the only thing I'm a little afraid of. The only risk you have is losing your stock option investment money and the anticipated future profits.

You'll never be liable for any losses in case of bankrupcy. Nor are the company founders for that matter well, unless they've backed company loans with personal money.

Shareholders in an incorporated company Inc might lose their investment, but do not share in the company's liabilities. As an option holder, you have only invested your time, up until the point you exercise your options. At that time, you need to pay the exercise price to convert your options to actual shares in the company.

Stock options are just that: Only options to purchase stock with a preset price. You will not be a stock holder before you use them to purchase company stock.

Don't worry, the risk with stock options is only that they might not be worth anything. This is however based on my experience with European legislation, so you might want to double check this.

In some countries there's a risk that you pay tax on profit even though you haven't realized it yet: What is an option grant with a reliable source in your country. Although, I think Dries highlights one of the great reasons for wanting to work at a startup, aside from compensation, "the daily what is an option grant of working with high-quality colleagues in a fast-growing company", this post does seem to be tied to compensation in a major way.

There might be another liquidation event such as the sale what is an option grant acquisition of the company. In that case, your shares might be sold to the acquirer and you get the moneyor they might transfer into shares of the acquirer which could be public company shares that can be sold.

A company that never goes public or that doesn't get acquired might also decide to pay a dividend to its shareholders. Third, there is a pre-IPO market for shares too, and you might be able to sell your shares that way. You forget to mention that companies like to put restrictions on when you can turn your stock options into stock. Also, if you sell your stock, it's subject to be taxed in not-entirely-fun ways. Not that stock options are all bad, but there are some more downsides than "the company might not ever be worth something" and it would be good to mention those too.

As I wrote what is an option grant the top of my blog post, stock options is a very technical topic. It is impossible to cover all the details in a single blog post. In fact, there are books written on the topic of employee equity, classes thought on what is an option grant subject, etc.

Let me try to reply to both remarks; i stock option restrictions and ii tax implications. These are valid remarks that might warrant a longer follow-up blog post. For now, let's kick it off with this comment to see where this might go. First, stock option plans vary from company to company. Every company tweaks their stock option plan relative to their situation and desired outcome.

For example, in most cases, employees do not gain control over the options for a period of time. This period is known as the vesting period.

Once the options are vested, they usually can be exercised. Different companies have different vesting schemes. What is an option grant vesting period could be considered a restriction, but it is an extremely common one because it protects the company, and by extension all of its employees and shareholders. Maybe I need to do a follow-up blog post on the topic of 'vesting' because this might not be clear to some? If you had different restrictions in mind, I'd love to hear more about your thoughts.

Second, it's hard to write about the tax implications of employee equity as it depend on the tax jurisdiction what is an option grant employee falls under e. Surprisingly you're better of in Belgium. Buying and selling stock is usually subject to income what is an option grant or capital gain taxes. On top of that there might be special legislation around stock options to incentive entrepreneurship or to stimulate the economy -- the US currently offers temporary exemption of capital gain taxes in certain situations.

It's great to see people are genuinely interested in discussing this topic. As I wrote in my blog post, many of the most talented people I know, have an entrepreneur hidden inside them. At the same time, I wasn't sure what reactions to expect from a blog post like this. What is an option grant can talk about technology all day, but sometimes it is nice to talk about what is an option grant work situation, professional career and entrepreneurship.

Sounds what is an option grant I should do a couple more what is an option grant posts on startup topics. It's a fascinating world after all. Drupal stuff is awesome, but being 'open source' about your experiences with a startup—especially what is an option grant as what is an option grant as Acquia—always makes for an intriguing read. Back inI joined eBay and was granted some stock options as well. At that time, eBay employees earned a significant amount of money thanks to these stock options.

Same story at Accenture. Yes, you can make a considerable amount of money 2. Tax regulation can spoil the fun e. In some countries, you need to keep stock options for several years before vesting. Most companies require you to vest the options when you leave 5. Worst of all are the "closed windows" when quarterly results are about to be published: Stock price was often exceptionally high during these closed windows.

If you're a clever employee, you combine them with call options. Reality is that most of my former colleagues that were awarded stock options never gained any what is an option grant from them. It really has to be the right combination of technologies, company leadership, timing, options, and what is an option grant on to be worth it to a potential employee. I've worked in what is an option grant few startups where I basically ignored the stock options for a number of reasons, including:.

In these cases I ended up spending some time at the company anyway, but only because I was satisfied with the salary at the time, and assumed that either the company or I wouldn't be around by the time any options were vested. My experience is that the typical vesting period is four years using monthly vesting with a one year "cliff". Subsequent vesting happens monthly. That seems to be the industry standard in technology start-ups. Skip to main content. So what exactly does that mean for you as an employee?

Can I please have my options backdated? It's really my lucky day, thanks Dries. Your risk if the company fails is the money you pay to exercise your options. Hi, what if the company never goes public like Facebook:

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Every startup grants stock options sooner or later. To help make it easier, I have put together the following checklist for private corporations not LLCs granting stock options.

Please let me know if you think this is helpful, or if you have anything to add. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U. They did not inform me I could purchase options owed me until it was too late. The window to purchase was June. I received a voice mail on June 30th about this.

In prior years they informed me about options by mail but did not do so this year. The other means by which I could conceivably have found out was through a company web-page for ex-employees, but they never informed me I had to sign up on this site nor did they provide any related training. Enter your email address to subscribe to this blog and receive notifications of new posts by email. Thoughts and commentary on the law of startups. Brought to you by Davis Wright Tremaine.

About Disclaimer Privacy Policy. Prior to Granting Stock Options Adopt a stock option plan — First, adopt a plan and draft standard stock option agreements under the plan. Grant all of your stock options under the plan -If you are granting options outside the plan, special considerations will arise, which are not addressed in this checklist.

Confirm that you have sufficient shares- Prior to granting stock options; confirm you have the number of shares under the plan to grant the new batch of options. Rule has mathematical limitations, meaning—there is a limit to the number of securities you can issue under Rule , and you do not want to exceed that limit. Eligible recipients- Confirm each prospective option recipient is eligible under the plan. Generally, only individuals qualify. Confirm the residency of recipients — Before every grant of stock options, confirm the residency of the prospective optionees and confirm that you are compliant with the Blue Sky law of each state in which investors are resident.

Fair market value- Make sure that the options are being granted at fair market value in compliance with Section A of the Internal Revenue Code. Board approval- Have the Board approve the option grants pursuant to a Board Consent or resolutions adopted at a meeting.

If the vesting schedules for any of the options are different from the standard specified in the standard agreements, make sure the Board consent describes the vesting schedule.

Signed agreements- After each grant of stock options, give each recipient a copy of the stock option plan and their stock option agreements, and have them sign the agreements required under the plan. Capitalization ledger- Update the capitalization ledger once the option is approved. About Joe Wallin Joe Wallin focuses on emerging, high growth, and startup companies. By William Carleton November 30, - By Joe Wallin November 30, - 1: By Stock Option Deduction Debate: Journey Down the Rabbit Hole July 19, - 6: By Anonymous October 23, - Subscribe to Blog via Email Enter your email address to subscribe to this blog and receive notifications of new posts by email.

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