For grants to employees, startups often move towards a relatively rigorous process in which employees in specific job titles receive a fixed not a negotiated amount of stock.

Monetize Your Private Company Stock Options

Such a hiring matrix helps the management team use the allocated stock pool more effectively and creates consistency among employees always a virtue. Further, after the company is funded, investors will expect the company to have such a matrix, and the board will expect management to keep all grants within the amounts specified in the matrix and, if amounts fall outside the matrix, the board will expect management to justify the exception.

Such a matrix is usually based on industry surveys conducted by companies such as Radford, Advanced HR, J. Thelander Consulting and the Ravix Group.

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It is also not uncommon for angel or venture capital investors to provide guidance and help create company guidelines, which may be strongly influenced by local market practices. All stock option grants should have some vesting period because, with rare exception, the contributions the recipient will make will be in the future. For more information about founder vesting, please see our article here.

Vesting is usually time based, typically monthly, but can also be based upon specific activities. These activities could include attending important meetings such as advisory board meetings, performing specific activities or delivering certain work product. Note that there can be accounting consequences associated with such performance-based vesting; however, those consequences are likely not meaningful, as long as the relevant activities are performed prior to a first financing.

Even with early employees, startups should consider adopting the most common vesting formula: a one-year cliff before an employee vests any shares. Of course, providing for some special vesting for an employee joining early might be justifiable, but in general the earlier that standard vesting is adopted, the better. The reason for a one-year cliff is simply that a decision has been made to not award shares to employees who leave or are terminated before they have served for a year.

How to value your equity

Setting the purchase price the "exercise price" or "strike price" of a stock option also is a very important consideration. Incentive stock options ISOs must not have a purchase price that is less than fair market value FMV of the common stock on the applicable date of grant. With respect to non-statutory stock options NSOs , Section A provides a specific set of factors that should be considered when determining FMV and setting the purchase price of an NSO, including a presumption of reasonableness if a third-party independent valuation report is obtained and approved by the company.

Significant individual tax and adverse accounting effects may apply if NSOs are granted with a purchase price that is less than FMV on the date of grant. In terms of human impact, however, the higher the purchase price for a stock option, the less incentivizing the award may be, unless the grant size is enlarged which increases dilutive impact.

Therefore, it is not uncommon for a company that matures to a high valuation to experience issues with granting stock options and, ultimately, to give consideration to granting different types of equity awards such as restricted stock units or RSUs. What if I have to leave employment before the Exit? Can I keep my options? After employment, when do the vested options expire? The post-employment expiration date for options is negotiable.

If you have a family event and need to relocate or quit before the big exit, even though your options are vested, you could lose all the growth that resulted from your hard work. The end result is negotiable but its better to settle these details upfront so that you do not have to live with the day expiration that is found in many awards.

What if there is no exit in 7 or 10 years? Is there any way to get liquidity on my options, like a Company buy-back? And, aksing this question opens the door to a conversation about cash liquidity, cash compensation enhancement, net exercise processes to cover taxes. If the value of the portfolio company is very low, would restricted stock and 83 b election be better for tax purposes than stock options? You may need an executive compensation attorney or tax professional to help you figure this out.

Part 2: Strike prices and dilution

These seven questions give you a starting place to evaluate the stock options in your employment offer. See more ».

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Click here to read more about how we use cookies. Sandra Cohen. To embed, copy and paste the code into your website or blog:. Send Print Report. Attorney Advertising. Published In: Contract Negotiations. Incentive Stock Options. Job Offers. Portfolio Companies. Private Equity Firms.