The classic stock option is an option to buy a share of stock at a specified price.
Say you get to buy some number of shares for a penny each. If those shares are worth meaning they can be sold legally for more than that penny, you make money.
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- Understanding Startup Stock Options;
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In theory. Understand the basic numbers on shares in a company: charters specify how many shares there are, and if you know that number then you can guess what a share is really worth by dividing what the company might be worth by the number of shares outstanding. None of this matters until a company is actually traded.
Call that a liquidity event, and investors call that the exit. Meaning that it was pretty hard to sell them; usually impossible. Shares can also be worth money when a big company buys a startup. If the buyer pays cash, then people with options get to cash in as long as their option price is lower than the per share price of the acquisition. These days IPOs are extremely rare, so exits are usually by acquisition. There are a lot of legal restrictions.
How Employee Stock Options Work In Startup Companies
Stock options have been abused for years. So the government watches them very carefully. Issuing stock options takes some legal work. People get fooled by stock options. I know someone who left one company to go work for another because the second one gave lots of stock options. What is a Stock Option?
Understanding Startup Stock Options
Understanding the Equity Component of an Offer There are a few key components to an equity offer that you should always look for. Number of Options. The number of shares you have the right to purchase. Percentage Ownership. Strike Price. The per-share price that you pay to exercise your options. Vesting Schedule. A typical vesting schedule is four years with a one-year cliff.
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There are plenty of other vesting schedules too. Some companies have a five-year vest with a six month cliff. When should I exercise my options? An Option Pool almost always consists of non-voting shares, so employees will be able to benefit from the growth of the company without having to vote on management issues.
How to Make Startup Stock Options a Better Deal for Employees
Careful consideration should be given to the size of the Option Pool. Changing the size of the Option Pool is a complicated process and is best avoided if possible. The Option Award Agreement is the actual contract between the company and the employee receiving options. But the Option Award Agreement will need to be customized each time one is signed by an employee. The Exercise Price can be a tricky issue. Employees will get the most benefit from a low Exercise Price.
It must reflect the fair market value of the shares on the date options were awarded not when the shares are actually purchased.
At Ownr, we have a helpful tool built directly into your Dashboard to give a rough approximation of a reasonable Exercise Price when awarding options. Given that the overall number of options is limited to what is in the Option Pool, options come with definitive timelines for expiration.
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The most common situation where expiration dates are important happens when an employee leaves the company either through resignation or termination. The departing employee will have a certain number of days to exercise the options and purchase shares. If the employee does not act within the set timeline, the options will expire and get returned to the Option Pool. These timelines are strict and need to be observed by the employee in order to avoid losing out on the options.
A reasonably common expiry period is 90 days, although it will depend on each particular company.
In this case, the employee needs to decide whether to exercise the options and purchase shares.