Options pool Equity grant considerationsConsiderations in determining equity grants Strike priceVesting Accelerated vestingOption grant process and capitalization table managementOption grant agreement formsRecommended capitalization table management tool: CartaRefresh grantsAdditional resources
Stock options are a form of equity compensation in which an employee is granted the right to purchase a certain number of shares in the company at a predetermined price (the "strike price"). These options usually vest over time, meaning that the employee can only exercise their right to purchase the shares after a certain period of time has passed. This is often done to incentivize employees to stay with the company and contribute to its growth. For private companies, the strike price is typically based on the company’s 409A valuation, which determines the fair market value of a share of common stock. The number of shares that can be granted to employees is typically determined by an options pool, which is established during the entity formation phase of the company. The options pool is a set percentage of the total shares outstanding and is reserved for future equity grants to employees.
During the entity formation phase, each company will establish an adequate employee options pool.
Equity compensation aligns incentives between the company and the employee base. It can serve as a great tool to attract and retain talent.
At OCV companies, we believe that all full-time employees should receive equity incentive in the business they’re helping to build. There may be situations where equity issuance may be impractical given local country restrictions and/or team member preference. These will be evaluated on a case by case basis.
Similar to cash compensation, equity grants should reflect a candidate’s:
- Role & responsibility at the company
- Experience level
- market indications for comparable positions given the stage of development of the company.
Cash and equity compensation should be considered holistically as an overall package.
Equity grants should also consider the remaining options pool available for candidates and the overall capitalization table of the company.
Determination of equity considerations for employees is not an exact science.
Some platforms exist that charge users to access tracked comprehensive data on equity compensation:
- Founders can see our Company Equity Grant Guidelines here
All option grants come with a strike price or exercise price based on the fair market value of the company’s common stock on the date of the grant. In private companies, the strike price or fair market value is determined by the company’s board of directors, often based on a third-party valuation report known as a 409A valuation. It is important to issue options at the prevailing fair market value to avoid negative tax consequences for the employees.
The strike price represents the price or an amount the employees need to pay in order to exercise their options. For example, if an employee has 100 vested options with a strike price of $1.00/share, they would need to pay the company $100 in order to convert their options into common shares in the business.
Our standard vesting schedule for employees is four years with a one year cliff.
Founders (including CEOs) will vest over a four-year period with no cliff (see Step 4: Issue equity to founders and advisors, Step 5: Establish the company’s options pool ).
Equity granted will typically vest over time to ensure that employees and founders who leave the company early do not receive the entire equity amount associated with the total issued. Vesting schedules will sometimes include a cliff which is a required minimum amount of time for vesting.
For example, consider an employee who has been granted 1% of the fully diluted equity of the company as options (where vesting can apply similarly as with common stock) with a four year vesting period and a one year cliff. In such a scenario, if their employment comes to an end at 6 months time, that employee would not have vested 1/8th of the total amount of options granted because they would not have reached the cliff of 1 year (which would mean a minimum of 1/4 of the options vests). This employee would vest 3/4 of their options at their third year of employment and be fully vested at their fourth year of employment.
Time-based vesting (described above) is considered the industry standard. There are established tools and common practices to manage time-based vesting plans.
Performance-based vesting can offer additional benefits such as aligning incentives with company goals and motivating high performance. Performance-based vesting is generally more appropriate for the executive team than the entire company.
Compared to time-based vesting, performance-based vesting are more complex to design, administer, and evaluate. Setting specific performance criteria, measuring progress, and determining whether employees have met the criteria can be challenging. It’ll require significantly more administrative effort and resources. Additionally, employees may face greater uncertainty with performance-based vesting. If they do not meet the performance criteria, they may not receive the expected equity rewards. This uncertainty can affect job satisfaction and morale and create challenges to recruit talent. While performance-based vesting can motivate employees to achieve specific goals, it may not provide the same level of retention incentives as time-based vesting. Lastly, performance-based vesting plans often require thorough documentation and reporting to ensure that the company is compliant with accounting and tax regulations.
OCV companies’ standard stock plans (including founder common share purchase) do not automatically grant vesting acceleration. The Board must approve any vesting acceleration (which can be added any time).
There are three tiers of potential acceleration schemes to consider for executive hires:
- Double-trigger acceleration: All or a portion of unvested shares accelerate in the event of (i) change of control (M&A scenario) and (ii) termination without cause or resignation for good reason (i.e. the executive is laid off without cause or if they resign because of material reduction in salary, relocation of office, etc.). This means that the executive’s unvested shares accelerate in full when both (i) and (ii) occur, usually within 12 months. This is common and of no harm to the company.
- Single-trigger acceleration upon a change of control: Executive’s unvested shares accelerate in the event of a change of control. This is not commonly seen in offer letters and may raise concerns in future rounds.
- Single-trigger acceleration for termination/resignation: Executive’s unvested shares accelerate in the event they are terminated without cause or resign for good reason. This is akin to a severance-type arrangement, where if the executive’s service terminates, they get a portion of their unvested shares accelerated. This is also uncommon in offer letters, and not recommended unless there’s a compelling reason to do so.
- When early stage companies allow for this type of acceleration, it is normally 3-6 months of vesting acceleration at most.
Vesting should not accelerate in an IPO. Shares would continue to vest as they did prior to public filing.
OCV (in our board capacity) would consider double-trigger acceleration for CEO and CTO hires only based on company-specific considerations.
The Legal Team manages OCV companies’ capitalization tables and issues new equity grants on a quarterly basis.
Each company will receive a batched-equity grant tracker from OCV to collaborate with the Legal Team. It is the company management’s responsibility to review and confirm new hire start date, which is the vesting start date.
Prior to an external funding event, all equity grants must be approved by OCV (in its sole board member capacity).
The Legal Team provides and drafts option grant agreement forms. Locally compliant option grant templates are available for the following countries as of November2023:
Template language is preferred in most non-US countries where applicable and the above list of templates will be confirmed and updated prior to new options issuance.
Template language is periodically reviewed by local counsel, but because our US-based legal team is not licensed in all relevant jurisdiction(s), they cannot guarantee that those templates satisfy all the requirements of the relevant jurisdiction(s), which may pose some enforceability, tax, or other risks to the company. A disclaimer will accompany such templates, reflecting those limitations.
For other countries where the legal team is not licensed, local counsel licensed in those relevant jurisdiction(s) will prepare options grants and provide legal advice specific to the proposed options. Engaging with local council will provide companies with as much assurance as possible that the grants intended for issuance are enforceable, have no unforeseen tax or other consequences for the recipients, and satisfy the relevant requirements in those jurisdictions. The legal team will assist with engaging local counsel for that purpose and with negotiating the fees associated with their review.
Local counsel review for option grants will cost between $3,000 to $5,000 per instance.
Note: Contractors are not eligible to receive equity / stock option grants.
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Document retention when canceling Carta subscriptions
A general list of recommended reports to download (some may not be applicable):
- Cap table reports, including ledgers by type and class for each calendar and fiscal year-end, as applicable
- Stock plan reports
- Exercised and settled reports
- Historical terminations report
- Tax withholding reports
- Rule 701 analysis worksheet
- Transactions audit report
- All documents from Library and Templates sections, including stock certificate legends
- Board consents (if any)
- 409A valuations
- Forms 3921 ( if applicable )
- ASC 718 expense reports (both grant date and mark-to-market for all historical periods, if applicable)
- Stakeholder contact ledgers and information
- Cost center / Relationship history and information
“Refresh grants" typically refer to the practice of issuing additional stock options or equity awards to employees or team members over time. These grants are meant to "refresh" or replenish the equity incentives that employees receive after their initial grants have vested or expired. Refresh grants are a common tool used by startups to retain and motivate employees, especially in competitive job markets where attracting and retaining top talent is crucial.
As a default, the initial options pool established at an OCV company launch do not include refresh grant allocations. The timeline from founding to Seed round is expected to be ~18 month in general. With a standard vesting schedule of “4 years & 1-year cliff”, most new hire grants would not have surpassed 50% vesting prior to Seed round.
Founders should consider employee retention and refresh grant allocation in determining options pool size as part of the Seed (and any future financing) round.
- Include refresh grant allocation in options pool proposal as part of the upcoming financing round (this is your budget in building out the refresh equity program)
- Create a program / standard guidelines in administering refresh grants that meet the company’s goals and objectives.
- The timing and criteria for refresh grants can vary widely from one startup to another. They are typically based on factors such as an employee's performance, tenure, and the startup's valuation or funding rounds. For example, a refresh grant might be issued every year or two to employees who have performed well and are seen as key contributors to the company's success.
- Refresh grants are also subject to a standard vesting schedule.
- Reminder: The main purpose of refresh grants is to ensure that employees have ongoing incentives to stay with the company and help it grow. As the initial grants vest or expire, employees may lose some of their motivation and ownership in the company. Refresh grants help mitigate this by providing a new set of equity awards.