%-#-$ – Startup Equity: It’s Enough to Make You Swear!

untitled7Figuring out the right amount of equity compensation at startups is a challenge. How much should I grant? How big should the grant be? How should I size the grant relative to base pay? Investors, boards, executives, HR and compensation departments at start-ups have conflicts over these questions all the time. In the past I have written about the 11 Reasons Your Equity Compensation Survey Data is Wrong. This article focuses on three common ways to determine equity at startups regardless of your survey source.

% Percentage of FD Outstanding Shares

This is where most companies start. The first 10 or 20 key players at a start-up are Continue reading

Could the stock options or RSUs you receive from a “unicorn” startup be diluted?

Question (Orig. on Quora):

Of course the rsu’s can be worth nothing if the company implodes, but other than the company simply failing, is it possible for my stock to become worthless?

Answer (by Dan Walter):

Sure. Imagine the company goes through a down round financing. Imagine the new investors put a structure in place that ensures they receive their full value if the company is sold below a given price. If the company is eventually sold below this price then all of the value of the company would be paid to the latest investors and nothing to the holders of employee equity.

This is just a super simple hypothetical but I can bet that some people on Quora have real horror stories about similar transactions.

What are current (2016) best practices for employee stock option programs for US pre-IPO startups?

Question: (org. on Quora)

Answer (by Dan Walter)

Hi Alex.  Thanks for the A2a.  And thanks to Shriram Bhashyam for also recommending me.
The first thing to clarify is the difference between “best practices” and most common practices. In the realm of equity compensation the most common practices are seldom the best. I will try and cover a bit of both.
“Early Stage” has also become a term of art in many cases. In this case I will write from the perspective of a company who may have up to a medium sized B Round. Your company may certainly fall into a different category.
Lastly, before I get into details, please realize that essential ANY equity compensation data is wrong at some fundamental level. Since you are unlikely to know how another company has designed their plan, what their investors expectations are, what the releasing timeline and potential value at the time of liquidity and whether the liquidity event is focused on IPO or acquisition (*and a series of other potential factors), you may be comparing apples to hotdogs, or plastic cups. (A list of the 11 reasons your equity compensation data is wrong)
The most common practices in the Silicon Valley (another assumption I am making, since these rules may not apply to you if you are located elsewhere) have been generally boxed in by VCs over the past couple of decades. The VC sway on startups is so strong that many companies (and many VCs) don’t realize that there may be other ways.  In summary:

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If a start-up terminated an employee, is it required to allow them to exercise the relative portion of their stock option grant that is yet vested?

Question: (org. on Quora)

Answer (by Dan Walter)

This is a fairly common question. The short answer is no. But, it depends.
The first thing you should turn to is your grant agreement.  This will explain things like vesting schedules (generally when you can beging exercising stock options, or when you gain access to the stock or cash underlying things like. RSUs.  The vesting schedules may also require that a change in control or IPO take place before any vesting is finalized.
Your agreement is also the most common place to see the details on post-termination grace periods.  This is what may allow you to exercise any vested amounts after you  leave. The rules for these are usually different depending on the type of termination.  Example:  Death or Permanent Disability may give you 6 months or a year, termination without cause may give you 30 days or three months, but being fired or “terminated for cause” often results in an immediate forfeiture of anything vested.  Anything unvested usually is cancelled the date of termination, regardless of the reason.
If your vesting schedule allows exercises and your termination grace period allows exercises, they may still be additional restrictions that would keep you from exercising.  Some of these may be defined in your agreement.  Others may be found in the plan document.
You need to ask the company to put in writing their reasons for not allowing you to exercise.  And you need to do this quickly.  If there is a grace period you don;t want to mess around with the grant after that expires.  If the company is on the edge of a transaction like an acquisition, you don;t want to have to learn a new set of people and rules.

When should start-up co-founders discuss equity?

Question: (org. on Quora)

When should start-up co-founders discuss equity?

 

 

I’m leaving a startup. How much co-founder equity should I get?

Question: (org. on Quora)

As a grad student, I worked 5M part-time (25% of total time) with a co-founder, who came up with, funded and executed the idea. We were supposed to split 50/50 if I become full-time. However, we missed a  milestone & I’m leaving to look for a full-time job. We never had a formal discussion with a contract, details on vesting schedule, etc.
I want to be compensated in equity for the work I put in. How much equity should I ask? What % equity is fair?

Answer (by Dan Walter)

culture. Learn more at www.performensation.com. My expertise includes equity compensation programs.