VIDEO Startup Stock Options: Exercise Price Basics

Negotiating your startup stock option offer? Use this video to understand the exercise price. 
 

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

The C-Level View - Fine Print Issues in Startup Executive Equity Grants

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

For executives trading significant cash compensation for startup equity, the fine print of the equity documents can significantly change the risk/reward profile of the deal. Be on the lookout for value-limiting terms in the Equity Grant Agreements, the Stock Plan and the Certificate of Incorporation.

Equity Grant Agreements

The Equity Grant Agreements and Stock Plan are usually not provided to the executive with the Offer Letter, as the official equity grant is not made until after hire. However, these agreements contain important details about the grant, so it makes sense to review them before agreeing to the number of shares or signing the Offer Letter.

For example, the Equity Grant Agreements may give the company the right to forcibly repurchase shares from the executive after termination of employment, even if they are vested shares of restricted stock or vested shares issued upon exercise of options. This dramatically limits the value of the equity, as the most significant increase in value of startups has historically been at the time of an exit event.

They may also require the executive to agree to future retroactive changes to the terms of the equity. For example, they may include the executive’s agreement to be bound to repurchase rights that might appear in future changes to the bylaws or the executive’s agreement to sign onto exercise agreements or stockholder agreements in the future which may have onerous terms.

If the Equity Grant Agreements have repurchase or other forfeiture rights for vested shares, it makes sense to negotiate these out of the deal or provide for alternative compensation to make up for the potential loss in value. If the Equity Grant Agreements have commitments to be bound by unknown future terms, it makes sense to remove these commitments and have all relevant terms provided up front.

The Stock Plan

The Stock Plan (otherwise known as an Equity Incentive Plan) can have some of the same red flags addressed above under Equity Grant Agreements. They may also have other onerous terms especially relating to treatment of executive shares in a change of control. The company may reserve the right to terminate, for no consideration, all unvested options at change of control. This could be a significant cancellation of value and could seriously decrease the executive’s leverage in negotiation of post-acquisition employment terms.  Also, if an executive has negotiated for favorable double trigger vesting acceleration upon change of control rights, this term could invalidate that benefit, as cancelled unvested options would not be available for acceleration in the event of a post-acquisition termination.

If the Stock Plan has this or other onerous terms, it makes sense to negotiate for modifications in the Equity Grant Agreements or for a grant made outside the Stock Plan with terms crafted for the individual executive. If the Stock Plan has a company right to cancel unvested options at change of control, it makes sense to address this directly in the language of the executive’s vesting acceleration upon change of control term so that the cancellation cannot occur without a corresponding acceleration of vesting.

Certificate of Incorporation

The Certificate of Incorporation will outline some key economic rights of investors, including their liquidation preferences. Executives joining established startups can be misled by their percentage ownership if the investors have significant liquidation preferences, either because of significant fundraising or onerous investor terms. For example, in a company with $50 million investment and outsized investor rights of 3X participating liquidation preference, the investors would take the first $150 million in acquisition proceeds and participate with common stockholders in the distribution of the remaining proceeds.  

If investor liquidation preferences are high, it makes sense for an executive to negotiate for significantly more shares to balance the risk or negotiate for a management retention bonus to be earned upon acquisition to make up for the loss in equity value due to these preferences.

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

 

VIDEO Startup Stock Options: Negotiate the Right Startup Stock Option Offer

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

 

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

VIDEO Startup Stock Options: Startup Valuation

Stock Option Counsel for individual employees and founders in all matters relating to startup stock options or other employee stock. This video describes startup valuation for employees in a thoughtful, accessible way. 

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Best of Blogs: How to Value and Negotiate Startup Stock Options

NOTE: Updated February 23, 2016.

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

We have suggested the following free resources to Stock Option Counsel clients to help them master this area and gain confidence in negotiating their stock options and other employee stock. We hope you find this list helpful and invite you to contact us to find out how Stock Option Counsel can help you evaluate and maximize your startup stock compensation. Contact>

1.  Leo Polovet's' Analyzing AngelList Job Postings, Part 1: Basic StatsPart 2: Salary and Equity Benchmarks

2. Venture Hacks' I have a job offer at a startup, am I getting a good deal?

3. Andy Payne's Startup Equity for Employees 

4. Mary Russell's Startup Equity Standards: A Guide for Employees

5. Wealthfront's Startup Salary and Equity Compensation Calculator (This is very general but people find it helpful.) And Wealthfront's The Right Way to Grant Equity to Your Employees.

6. Patrick McKenzie of Kalzumeus Software's Salary Negotiation: Make More Money, Be More Valued

7. Piaw Na's Negotiating Compensation, from An Engineer's Guide to Silicon Valley Startups

8. mystockoptions.com's How does a private company decide on the size of a stock grant? (You may have to create a login)  

9. Michelle Wetzler's How I Negotiated My Startup Compensation

10. Mary Russell's Video Negotiate the Right Startup Stock Option Offer, based on Mary Russell and Boris Epstein's Bull's Eye: Negotiate the Right Job Offer

11. Mary Russell's Joining An Early Stage Startup? Negotiate Your Salary and Equity with Stock Option Counsel Tips

12. Robby Grossman's Negotiating Your Startup Job Offer

13. John Greathouse's What The Heck Are My Startup Stock Options Worth?! Seven Questions You Should Ask Before Joining A Startup

14. David Weekly's  An Introduction to Stock & Options for the Tech Entrepreneur or Startup Employee

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Negotiation Rhythms

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

We’ve all heard plenty of advice about negotiating.

The business world directs us to stay rationally focused, rely on exhaustive preparation, think through alternatives, spend less time talking and more time listening and asking questions, and let the other side make the first offer.[1]

The psych world counsels us to listen first, sit down, find common ground, move in, keep cool, be brief, forget neutrality, avoid empty threats, and don’t yield.[2]

These tips don’t have much meaning without knowing the underlying principles of negotiations, and studying tips alone is about as meaningful as learning dance steps without ever hearing the music.

The following three-part series presents the rhythm of negotiations as described in the Harvard Negotiation Project’s Getting to Yes: Negotiating Agreement Without Giving In.[3] It should be useful for those first learning to hear this rhythm and for those who have been dancing since the bazaars of their youth who may need to go back to basics to learn some tricky new steps.

Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. She is an attorney and the founder of Stock Option Counsel. You are welcome to contact Stock Option Counsel at info@stockoptioncounsel or (650) 326-3412.

Read on!

#1: Zone of Possible Agreement

#2: Best Alternatives to Negotiated Agreement

#3: Sales & Threats

[1] Take It Or Leave It: The Only Guide to Negotiating You Will Ever Need http://www.inc.com/magazine/20030801/negotiation.html via @Inc

[2] The Art of Negotiation | Psychology Today http://www.psychologytoday.com/articles/200701/the-art-negotiation

[3] Roger Fisher, William Ury and Bruce Patton, Getting to Yes: Negotiating Agreement Without Giving In

 

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.