Startups Stack Exchange Archive

Startup Options - Vesting Schedule and Exercising Options

posted by: Growler on 2016-11-05
tagged: tech-company, equity, stock-options
score: 2

I’m joining a seed-round startup and was offered three comp packages:

Slightly above mkt. salary, .41% options (15k options valued at $21k)
10k below highest salary, .56% options, (20k options valued at $29k)
20k below highest salary, .89% options, (32k options valued at $46k)

Fair mkt. value of company is $5.2m. I think this comes out to 5m shares.

4 yr vesting w 1 year cliff. I’m the 2nd full time hire developer, 4th full time employee.

I’m going with .89% equity (option 3) because I met the team and saw the product and it’s awesome. Also, we’ve signed on some big players as clients so the vision is convincing. I think there could be good potential for a buyout. So I think $20k salary loss / year would end up being nothing compared to risk of losing the .4% higher equity pkg. in the case of a large buyout.

Since I’m going more equity heavy in exchange for salary, I have a lot of equity questions:

Let’s say I leave after a year, so 25% of my .89% equity vests. I can leave this invested in the company and watch it grow and still exercise my right to buy at the original options price, right?
Same question as above, but what happens if I exercise my options when I leave? Do I get a payout of the current value of the options even if an exit hasn’t yet happened?
What typically happens if I’m in for a year, 25% vested, and the company exits. Do my options fully vest to 100% of .89% automatically?
The shares should be common stock, right ?

Note: this is different than my other question as this pertains strictly to exercising options as they vest.

Answer 11505

posted by: Jeff O’Neill on 2016-11-06
score: 2

The answers depend on your employment contract and options agreement so you should read those documents carefully.

Generally, you must exercise your options while you are an employee and you can’t exercise them after you leave. The options expire when you leave employment.

When you exercise your options, you are buying shares of the company at the option price. You don’t get a payout. You get a piece of paper that says you own some shares of the company. The company may offer to buy the shares back from you but they don’t have to.

When the company exits, the options generally expire. For example, if the company gets acquired at 11 months, your options expire and you get nothing. Some people are able to negotiate an acceleration clause in their employment agreements that fully vests all options in the event of an exit.

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