Tag: stock options

Apr 3 2012

How Often Do Employees Of VC-backed Startups Get Stock Options?

Question: How often do venture-backed start-up employees (let’s say non-executives) get stock option grants? Besides the initial grant when they start, how often do “re-up” grants come? Should they be expected after further funding rounds? After significant accomplishments/promotions? Never?

The short answer, at least in the US, is “most of the time.” It’s pretty standard for every employee of a VC-backed company to get at least a minor option grant as part of their compensation. Employees should expect these grants to vest over time (usually four years) and have a one year cliff (which means the person has to be employed for a year to have any of the options vest.)

Regarding the other question, it’s much more variable. In the previous post I talked some about “re-up grants”. In some cases, especially if there is a lot of dilution from a financing, there are occasionally broad grants across all employees post financing. However, in many cases, there aren’t, and employees should expect to take at least some of the dilution from subsequent financings, especially in up-round cases where the value of their underlying equity is increasing.

Additional grants occur on an employee by employee basis in two cases: (1) extraordinary performance (also referred to as a “spot grant” or “spot bonus”) or (2) long tenure – once an employee is fully vested (after year 4) they will often get an additional grant, although this will usually be much smaller than the original grant.

Apr 2 2012

How Do I Protect My Option Grant From A Down Round In The Future?

Question: I am considering joining a startup that is currently in the process of raising their next round of funding. I will be joining as a VP, reporting directly to the CEO, and considered an “executive”. Given the environment for this particular industry, it is very likely that the company will face a down round – perhaps as much as 50% of their last financing a year ago. What should I expect in terms of protection from both dilution and going under-water on my option prices given that I will be joining before term sheets and close of the round? Will my options be priced based on the previous round? Can I ask for some guarantees about % ownership and stock price post-funding?

Generally this is very hard to do. During your hiring process, you should address this directly with the CEO and ask him (a) what he thinks the prospect for a down round is and (b) if he’s willing to give you any guarantees on your stock position if one occurs. Most CEOs will say (a) I don’t expect there to be a down round and (b) no.

If you feel like you can negotiate then go deeper and ask for his word that if there is a down round you will receive an additional option grant that gets you close to your current granted amount. A great CEO will not commit to this – rather he’ll say it’s up to the team to increase value in the business regardless of external dynamics. If the team has performed well but the external dynamics have negatively impacted the value of the company (and subsequent financing), then it’s up to the board to consider additional option grants for employees in the content of this.

Some people will talk about the idea of being “trued up” in a subsequent financing. A long time friend likes to say “there is only 100% of a company to go around” so when someone gets “trued up” it’s coming out of someone else’s ownership. If a CEO commits to true you up in the future, recognize that it’s not a formal commitment unless it is documented as the CEO doesn’t have the authority to do this unilaterally (he’ll need board consent to do it.)

Now, let’s assume nothing has been committed to you up front and a down round subsequently occurs. In some cases, the company will grant additional options to make up some of the difference in dilution. This is rarely an amount that preserves your previous ownership as you should be taking some dilution, along with everyone else, as a result of the new financing. But – if the financing dilutes you 50% then a reasonable amount to expect would be an option grant that results in you only being diluted 25% to 33%. Of course, these numbers will vary a lot based on the actual financing.

If it’s a very material down round, in addition to granting new options, the company might reprice the existing options that are outstanding. This used to be difficult to do and have all kinds of weird accounting ramifications that tended to prevent this from happening. However, many of the rules have changed and all that is now required is a mildly tedious legal process.