🤔
Thought Experiments
Stock Options – It's all a Fugazi
1. What is Vesting?
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.
The market standard for early-stage start-ups is a 4 year vesting period.
What is the vesting period at thisapp?
Year 1: 12.5% of the total stock option allocation will vest monthly over the first 12 months. And on the first day of the 13th month, an additional 12.5% will vest immediately.
Years 2-4: 25% of the stock options vest in equal monthly weightings each year.
2. What is a cliff?
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.
The market standard for early-stage start-ups is a 1 year vesting period.
What is the cliff period at thisapp?
There is no cliff period.
3. What is a PTE Period?
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
The market standard is 90 days – (Don't work for these companies).
There are a few companies offer that offer extended PTE periods – here's a list of startups with extended exercise windows https://github.com/holman/extended-exercise-windows.
What is the PTE period at thisapp?
Our general PTE period is 10 years; there are a few conditions to note:1. Terminated for cause (breach of contract, misconduct, etc): 0 days.2. Leave the company or are made redundant (not for cause): 10 years
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.
Further reading:
ISO's
What you need to know about incentive stock options (ISOs) | Carta
Carta
NSO's
What are non-qualified stock options (NSOs)? - Carta
Carta
Tax
How stock options are taxed | Carta
Carta
Early exercise
Exercising stock options: Everything you should know | Carta
Carta
Click here to read more about company exercise loans.
There is a risk for the employee. They now have a genuine loan outstanding and 100% personal recourse.
Questions to ask:
What is the total number of shares in the company right now?
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.
Additional Resources:
Last modified 1mo ago