Newsletter! Request for Feedback: What Makes a Great Company Education Program on Startup Employee Equity
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Hello Startup Community!
Here’s your quarterly update on startup equity from Stock Option Counsel, P.C. Thanks for a great year!
Request for Input - Company Education Programs on Equity Compensation. Several companies and venture capital firms have asked me how they can best educate their new hires on their equity compensation programs. I’d like to ask for your input so that I can share a list of best practices. Would you please take a moment to send me your ideas and experiences?
I’m curious to hear:
How have companies educated you on your stock options, RSUs, etc.?
Have you had access to live Q&A sessions? On-demand video trainings? Online calculators?
What has worked well? Not worked?
Who presented training sessions and answered your questions? The finance team? The legal team? Outside consultants?
Have company equity portals, such as Carta or Shareworks, included educational content? Was it helpful? How could it have been improved?
What would make a top-of-the-line employee equity education program?
Please send me any feedback you have! I’m at info@stockoptioncounsel.com.
Many thanks in advance for your input. I really love being part of this community, and hearing back from members of this mailing list means a lot to me.
Thanks for a Great Year. I'd like to thank our clients, blog readers and newsletter subscribers for a great year. Thank you!
I'm looking forward to 2022 to continue our mission of empowering individuals to make the most of their startup equity opportunities.
Happy Holidays and Cheers to 2022!
Best,
Mary
Mary Russell | Attorney and Founder
Stock Option Counsel, P.C. | Legal Services for Individuals
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Uber IPO - Lessons for Negotiating Startup Equity Offers - Spring 2019 Newsletter - Stock Option Counsel, P.C. - Legal Services for Individuals
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Hello Startup Community!
Uber's IPO is a great lesson for startup employees on negotiating their startup equity. Unicorn startup recruiters have been telling hires for the past few years to value the offered RSUs at many multiples, even 10X, of the most recent investor valuation in negotiating their compensation offers. Since Uber's value has not risen even 2X in that time, any hires who accepted offers based on this calculus have lost significant value compared to their opportunity cost.
Individuals need negotiate for enough shares in a startup to balance their risk. The calculation for the right number of RSUs at a late-stage startup with a public-company-size valuation is the current investor value per share, not the potentialfuture value.
Shira Ovide explored this issue in Bloomberg Opinion last week with input from Stock Option Counsel:
Uber's example shows that employees at startups – particularly those who come aboard when the company is more mature – often don't get rich, even when the companies are successful. Many workers are at the bottom rung of stock holders and tend to have less information about their company's value and prospects than just about anyone else who holds shares. ... Mary Russell of Stock Option Counsel, which advises employees on compensation at startups, said people evaluating job offers at more mature startups should analyze only what the proposed equity is worth at the time of negotiation, not what it could possibly be worth in a dreamy future. That’s not always easy, because Russell said startup recruiters sometimes suggest that a 10-fold increase in valuation in the past is an indication of what prospective employees can expect from their wealth.
For more on using current value to evaluate startup equity offers, see this video from the Stock Option Counsel blog.
Stock Option Counsel, P.C. - Legal Services for Individuals. Thank you for your enthusiasm for my practice and for the Stock Option Counsel Blog! I will continue to send quarterly updates on important topics in the market for startup equity for individual founders, executives and employees. Please keep in touch.
Best,
Mary
Mary Russell | Attorney and Founder
Stock Option Counsel, P.C. | Legal Services for Individuals
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Winter 2019 Newsletter - Stock Option Counsel® - Startup Offer Letter? The Equity Issues Hidden Between the Lines
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Hello Startup Community!
If you have an Offer Letter from a startup, you may notice that it’s light on information about stock options or other equity. See this new post on the Stock Option Counsel Blog to learn the key issues hidden between the lines. It covers:
Grant Timing. The exercise price is not negotiable, but you will want to follow up after your start date to be sure that the board grants the options promptly. Delays are common and can increase the exercise price dramatically and reduce the value of your stock options.
Protection for Unvested Shares. The standard vesting schedule will not protect unvested shares in an acquisition. Consider negotiating for double trigger acceleration upon change of control.
Clawbacks and Other Red Flags. The equity incentive plan and stock option agreement are usually not provided with the Offer Letter. However, it makes sense to request and review those documents before signing the Offer Letter to identify clawbacks for vested shares or any other red flag terms
Tax Structure. The right tax structure will balance your interests in total value, low tax rates, tax deferral, limited tax risks and investment deferral.
You can see the full post on the Stock Option Counsel Blog, along with other great information on startup equity negotiations. Happy reading.
Stock Option Counsel, P.C. - Legal Services for Individuals. Thank you for your enthusiasm for my practice and for the Stock Option Counsel Blog! I will continue to send quarterly updates on important topics in the market for startup equity for individual founders, executives and employees. Please keep in touch.
Best,
Mary
Mary Russell | Attorney and Founder
Stock Option Counsel, P.C. | Legal Services for Individuals
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Have an Offer Letter from a Startup? The Equity Issues are Between the Lines
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Working for a startup? Learn more about the fine print terms of an offer letter. Plan ahead to protect your equity stake.
If you have an Offer Letter from a startup, you may notice that it’s light on information about stock options. You may see a few sentences noting that (1) the company will recommend to the board that the grant be made at the first market value on the date of grant; (2) the option will vest monthly over four years with a one-year cliff; and (3) the option will be governed by the company’s equity incentive plan and your stock option agreement. It sounds simple. But the key issues are hidden between the lines.
Change of Control Protections for Unvested Shares
A standard vesting schedule does not provide protection for unvested shares in the event the company is acquired. If you are joining in a senior position or as an early stage employee, consider negotiating for a double trigger acceleration upon change of control to protect the right to earn unvested shares. The most robust double trigger language would provide that 100% of unvested shares will accelerate if you are terminated or constructively terminated as part of or at any time following a change of control. See this blog post for more information on change of control terms for startup equity offers.
Clawbacks for Vested Shares
The equity incentive plan and stock option agreement are usually not provided with the Offer Letter unless requested, as the official equity grant is not made until after the start date. 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 incentive plan and stock option agreement may give the company the right to forcibly repurchase shares from the employee after termination of employment, even if they are vested shares of restricted stock or vested shares issued upon exercise of options. See this post for some examples of how those clawbacks may be drafted. Clawbacks dramatically limit the value of the equity, as the most significant increase in the value of startups has historically been at the time of an exit event. If this term, or any other red flag term, appears in the form documents, it makes sense to negotiate these out of the deal or provide for alternative compensation to make up for the potential loss in value before signing the Offer Letter.
Tax Structure
The Offer Letter may not include the terms of the tax structure, but if you have any leverage on those terms the Offer Letter negotiation is the time to address them. The right tax structure will balance your interests in total value, low tax rates, tax deferral, limited tax risks and investment deferral. This balance is different at each company stage. For example, at the earliest stage startups you may be able to meet all those goals with the purchase of Restricted Stock for a de minimis purchase price. At mid-stage startups you might prefer to have Incentive Stock Options with an extended post-termination exercise period to defer the investment until a liquidity event. At late-stage startups you might prefer Restricted Stock Units for a full value grant. See this blog post on Examples of Good Startup Equity Design by Company Stage and this blog post on The Menu of Stock Option Exercise Strategies.
Grant Timing
The company will set the exercise price at the fair market value ("FMV") on the date the board grants the options to you. This price is not negotiable, but to protect your interests you want to follow up after your start date to be sure that the board makes the grant of the options soon after your start date. If they delay granting you the options until after a financing or other important event, the FMV and the exercise price will go up. This would reduce the value of your stock options by the increase in value of the company’s common stock during that time.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Is the Battle for Talent Delaying Unicorn IPOs?
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Frederic Kerrest, Chief Operating Officer and Co-Founder of Okta lists recruitment as one of a few factors that influenced their choice to delay their IPO.
“There’s a few reasons specifically that we thought about when we went through the calculation [of taking another private financing rather than having an IPO]. Five or ten years ago, companies like us would have gone public at this point instead of doing this financing round, because it’s about the same amount of money you would raise in a typical IPO.
First of all, it’s interesting for potential employees who want to come join the company. The opportunity to join a pre-IPO company is something that’s interesting to them, even if it’s just 6 or 9 months before.”
“Do you think it’s harder to hire certain folks if you were public as opposed to being pre-public?”
“I think it’s a slightly different kind of person who wants to join a pre-public versus a ... public company. They have different profiles, they’re looking for different things. They’re looking for different things in terms of the company, in terms of the job, in terms of other things. ”
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Skype Repurchase Rights = Vampire Capitalism
I agree that it is unethical as it goes against the expectation of employees as to how their contributions are valued. If they don't know about it before they choose the company, they are making a choice without an essential term of the deal.
And it goes against the most idealistic ethic of Silicon Valley – that capitalism should be used by groups to organize and cultivate their own creative efforts rather than as a tool of vampires.
But it is not illegal. And I've seen worse in my Stock Option Counsel practice (twice this month alone). Congratulations on paying attention.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Quora Question:
What does it say about a company that has a Skype-like repurchase right in their stock option agreement? The company that I work for has a stock option agreement that has a Skype-like repurchase clause (See: Upgrading Skype and Silver Lake to Evil), basically allowing them to buy back exercise stocks at 1.5x FMV within 90days following the employee's end date/exercise date. I have never seen anything like this, is this to protect them/screw ex-employees? It basically mean my vested stocks can be easily bought back at 1.5x? Isn't it unethical?
Stock Option Counsel Answer:
I agree that it is unethical as it goes against the expectation of employees as to how their contributions are valued. If they don't know about it before they choose the company, they are making a choice without an essential term of the deal.
And it goes against the most idealistic ethic of Silicon Valley – that capitalism should be used by groups to organize and cultivate their own creative efforts rather than as a tool of vampires.
But it is not illegal. And I've seen worse in my Stock Option Counsel practice (twice this month alone). Congratulations on paying attention.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.