Stock options employee startup

An employee friendly equity plan is a win for the startup, as it excites the employee.

There is something to look forward to. New hires see older employees make money in a liquidation event, like a secondary sale, and aspire to earn that kind of opportunity at the company. Many founders consider the employee equity plan a sacrosanct that needs to be strictly defined. This is far from the truth. The equity plan needs to suit your organisational needs and needs to evolve along with the company.

What works at the founding stage might not work at the growth stage. It is best to have a long-term view and create a plan that can sustain the startup for eight to 10 years. This might seem counter intuitive, but having a uniform employee equity policy across levels might not work. What works for a middle level new hire might not be an incentive for a senior leader who has grown with the company. For instance, food delivery platform Swiggy divides its employees into four categories and has created an equity plan that works flexibly for each level.

At the middle-management level, employees do not receive ESOPs immediately upon joining but become eligible for performance-linked ESOPs later on, with these ESOPs typically being much higher compared to those offered to eligible employees upon joining.

Earlier some startups used to restrict the employee pool to single digit, in an attempt to protect founder and investor equity. That is counter productive. For meaningful wealth creation, a larger employee equity pool is necessary. Double digit equity pool should be the norm. Some startups use a miserly vesting schedule as a deterrent to employee exit. The idea is if there is considerable stock that is yet to vest, the employee might stay back.

This will result in your startup ESOPs not being considered valuable, with existing and potential employees looking at it just as a piece of paper. For instance, some startups have opted for performance-linked accelerated vesting. Mature founders realise and accept that employees could leave the startup and may not stay on forever!

How you deal with an employee when they leave is as important as how you treat the employee who stays. This is also true in the case of employee equity. Unvested options lapse upon resignation and in most cases if an employee has been fired for certain reasons, even vested options will lapse. When it comes to vested shares, employees need to exercise his option, which simply means converting the option to an actual share. Companies demand that employees need to exercise their options within a specified period of leaving the company.

Sometimes this can be just a few weeks; ideally it should be 90 days. Further, when there is a liquidation event there are instances when the former employee gets to sell his shares only at the end after current employees are done. Recently, Indian startups have begun offering former employees a chance to sell their shares along with current employees during secondary sale events See Urban Company Case Study below. When an employee exercises his option, he has to pay the strike price or exercise price to the company. This could be the current market value or at the face value of the share.

Strike price at face value, ideally of Rs 1 per share, makes more sense to an employee. Such equity is only as good as the wealth it creates. This means employees should have opportunities to sell the equity they own. Indian startups have in recent times been proactive about offering employees such opportunities. Urban Company is part of a growing club of top-tier Indian startups that are offering their employees the opportunity to cash in their employee equity.

In the latest buyback event, Urban Company employees were eligible to participate. In my conversation with key Urban Company leaders, Mukund Kulashekaran, SVP of Business at UrbanCompany, and Rahul Deorah, VP Marketing at Urban Company, they reiterated that the multiple opportunities the startup has provided its employees to capitalise on their ownership of the its shares is part of the highly employee friendly equity plan the company has instituted.

Some of the terms of the employee equity plan of Urban Company, which can be considered as best practices, are as follows:.

The Review

Ensuring employees get a chance to earn from their shareholding is key to the employee-friendly equity plan. You can have the best of terms but if the employee never gets a chance to sell, then equity stops getting valued. Mukund told me that the leadership of Urban Company was clear that if wealth creation for employees is a goal then owning equity is what matters. Such buyback events showcase to new hires and to those climbing the leadership ladder that equity is a valuable part of compensation.

What is the Difference Between Stock Grants and Stock Options?

Rahul told me the equity discussion is an important part of the conversation with prospective hires. This is why the three rounds of employee share buyback at Urban Company becomes important as new hires and others see that employees have actually made money and the value creation is not just on paper. Urban Company was planning the secondary sale pre-pandemic, but put it on hold when Covid struck.

However, once business re-started in May the company saw a quick rebound as Covid was accelerating the move from offline to online, which proved to be a shot in the arm for Urban Company and the startup has now crossed pre-pandemic levels in terms of business. This gave Urban Company the confidence to proceed with the planned share buyback. Mukund told me that when a company is doing well the whole process is quite straightforward.

Typically, there is a corpus that an investor or group of investors want to acquire the stake.

Preference was not given based on experience or role. The only condition is that the shares should not exceed the corpus. Mukund said since the team size is still small, the plan was to have conversations with the employees in case crowding out becomes a serious concern.

However, that turned out not to be the issue. I remember Abhiraj and Varun co-founders at Urban Company making calls to a lot of people to make sure that people actually liquidate. Your employer will likely tell you "your vested options will automatically exercise on acquisition, so it doesn't matter. If you were to join a big public company instead of a startup, you'd potentially receive an annual grant of RSUs restricted stock units instead of options.

Often times, these RSUs are offered as a benefit over and above your market-rate salary, whereas at a startup, options are often granted in exchange for a pay cut. Furthermore, RSUs in a public company are very easily liquidated and converted into cash or other stocks, so you can easily diversify out of the stock of the company you work for. When weighed vs the riskier, illiquid options you are offered from a startup, the RSUs can be an attractive alternative.

You should consider in your decision to work at a startup your personal risk tolerance. But you should also heavily consider how strongly you believe in the startup and its potential for growth.

If you're not all-in on it, you're probably better off going for the big-company option. Being a part of the early team is not the only way to get into a startup. So you weighed the risk and took the startup job Now you have options vesting, and need to know what to do with them.

Here's an outline of how to create a plan for that in a way that will balance your risk with your job-flexibility and ultimate reward. The best way to manage your vested options is to think like an investor. Most companies will tell you that the best thing to do is to sit on the options until the company exits. This is only true in some cases, but is always best for a company that is growing quickly, as it can force good employees to stay longer, and prevent bad employees from exercising their full grant of options.

The company's value will change over time. As an investor holding the option to purchase a given amount of stock, you should always evaluate the relative risk-reward ratio and determine whether you want to exercise your stock. Part of this means treating your employment there as an investor would.

You're taking a salary cut for the right to purchase the company's options. That salary cut is real dollars and cents. You should at all times determine whether you believe that salary cut is worth the options you're getting.