What You Should Know to Decide If Your Equity Grant is Fair?

Employee stock option is a great strategy adopted by employers for attracting and retaining talent, especially in a startup or venture-backed firm in today’s times.

But, when it comes to employee stock options, these vary from one form of stock compensation to another and the basic reason behind it is that most organizations provide employees these in place of remuneration or monetary compensation.

While most people could get thrilled with the idea of being presented with a stock grant and gaining financially in the future, these also come with several considerations and snags that they must be aware of. Below appended are some clauses that you need to be aware of as a recipient of stock options:

1. Vesting

Vesting is not a tricky clause and the vesting period is for a certain period in years. Some plans have a cliff of 12 months for first vesting and also have monthly and quarterly vesting. There are some other plans of vesting that have annual vesting. So read about all these before accepting the agreement.

2. Exercise

After vesting and also before expiry you have the option of exercising any time by paying the strike price.  But, you also need to know that some startups don’t allow you to exercise your vested options and have a clause that says the cashless settlement will be done upon exit and those startups also don’t want the hassle of dealing with a large number of the shareholder. Keep an eye on all these conditions before taking a decision.

3. What is the Strike Price? And how does it impact you?

Generally, the strike price is the current market place, but usually it’s a slight lower than the current market price. Periodic adjustment is made, but the reality is there’s a lag. If the strike price is less than the market price at the time of grant then the value of the grant is less than the strike price.

4. What are pre-money and post-money and what are the implications?

Pre-money and post-money don’t impact you as an employee to a great deal. First you should figure out that the post-money value of a startup equals the sum of the pre-money value of the startup.

5. What happens when you quit?

Most startups expect you to exercise all your vested options within few months and this can be financially inconvenient especially when the current market value is higher than the strike price. Some startups allow you to exercise vested options any time before expiry and separation.

6. In the event of a change in control, what happens to the unvested options?

It depends upon the terms of the agreement between the merger and acquisition and the unvested options may be yield or converted into equivalent options of the acquiring company.

If you have decided to work for a startup then first you need to take a strategic view of compensation and the strategic view involves computing earning over a longer time and taking some risks and at this time no one can help you assess your risks better than yourself.