Stock Options – It's all a Fugazi
Vesting is another word for unlocking; the vesting schedule determines the quantity and frequency by which your stock options unlock.
If you are offered 10,000 stock options and have a 4 year, monthly vesting schedule (48 months) – 208 shares will vest every month.
Cliff is a short word for probation period. Upon maturity of the designated cliff period, you finally own the options that have vested to date. If you leave before the cliff expires, you will lose the right to pruchase the options that have vested to date.
If you start on June 18th, 2021 & agree to a 1-year cliff period, then decide to leave before June 18th, 2022 you will lose the right to purchase the options that have vested to date.
Post termination exercise period (PTE) as known as the exercise window is the amount of time you have to buy your options once you leave. Yes, you need to BUY (4.) your options.
You decide to leave the company after your cliff period has matured. Your contract states that you have a 90 day post-termination exercise period. You have three options:
- 1.Come up with enough cash within a 90 day period to “exercise the option” – purchase the shares.
- 2.Forfeit the right to purchase your options that have vested to date
Note: Given that we do not have a cliff period, If you leave the company or are made redundant (not for cause) within your first 6 months the PTE period will be 90 days. PTE extension requests will be considered.
The total number of shares will allow you to calculate your total equity percentage – (Allocated shares / total shares) * 100 = equity %.
What is the vesting/cliff period?
See 'what is vesting' / 'what is a cliff' for further details.
What is the post-termination exercise period?
See 'What is a PTE period' for further details.
Is there excess in the current option pool?
Excess in the option pool means that the company will not need to issue more options to hire additional employees. This is important because your equity percentage is diluted every time the company increases the total number of shares. To see how dilution works, use the calculation mentioned in question 1 – only this time increase the total shares.
How much equity do you plan to sell by the end of the series A?
Whenever the company raises money, it will usually need to issue more shares. As mentioned above, when the company issues more shares, your equity percentage is diluted.
What is the current 409A price?
The 409A price reflects the strike price at which the vested options can be purchased.
- If the 409A price is $0.05c per share and you have 1,000 shares vested, then the cost of the shares is $50.
However, the market value of the shares is usually equivalent to the most recent investor valuation.