equity, finance, stock-options, employee-compensationLet say you are the early employee of a startup, I understand most companies require you to have 3 to 4 year vesting schedule, but they vest on real equity (no need for the staff to pay money to purchase) or just stock option?
Which one is more common in US?
In the US (and elsewhere) stock options are more common. An employee or an advisor involved at the earliest stages of the company may occasionally get some, as might a high profile executive (e.g. a shiny CEO). But those things are pretty rare insofar as I’m aware.
In my own experience, founders immediately focus on how much you’re willing to invest in the company if you discuss stock rather than options. The only time you’ll convince a founder to issue you stock is if you’re a late stage cofounder for all practical purposes (and getting underpaid to reflect this).
See this article on equity and salary negotiation if you’re US-based. Negotiation options for an employee include, from best to worst from a tax standpoint:
As you’ll note, the first two basically require you to put cash forward and buy the stock.
Once an employee pool is set up (future stock options will come out of), increases in the amount of equity in circulation tend to be very rare events. Doing so dilutes shareholders, so that only makes sense with the requisite capital injection. And as such, it’s stock options only for all practical purposes.
If you have not raised any money then it is typical to offer equity. On the other hand if you have already raised a significant round like the series A then you will offer stock options. The reason is that without raising money (or having any significant revenue) the real value of the shares is close to zero so stock options and equity are much different. Since you can buy all your stock options for close to zero amount. However, after you raise a round the company is valued and share price will reflect that amount. And at that stage offering stock option is usually preferred (as equity may not even be available at that point).
During a major round of funding (like series A) an employee stock options pool is formed (around 15%-20%). The people who join after that get their shared allocated in form of stock options from that pool. Giving more equity directly at this stage will dilute everyone else’s share and so may not be possible (due to external investors and VCs).
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