You started your swanky new job at the latest startup destined for greatness. You got the offer letter that says you have unlimited PTO, your sub-par base salary, and hopefully a number of options that you'll be eligible to purchase.
- What are options?
- Number of Options or Number of Shares
- Strike Price
- Vesting Commencement Date
- Vesting Schedule
- Termination Period
- Transferability
- Lock-Up Agreement
What are options?
Options represent shares of a company that you are eligible to purchase. 1 option represents 1 share that cannot be distributed to anyone else unless you forfeit the option.
An option and a share are not the same however. An option gives you the right purchase a share at a given price meaning you do not own the share until you exercise your option. TLDR: If you buy the option, it becomes a share.
Number of Options or Number of Shares
This value represents how many options the company is willing to offer you. While this number may seem high or low, you don't truly know how much the company values you unless you know the total number.
If the company offers you 1 option and there are only 10 shares outstanding, you would own 10% of the company.
If the company offers you 1 option and there are 100 shares outstanding, you'll only own 1% of the company.
Strike Price
This is the price you can exercise your options at. The strike price is set for the entire length of the grant.
For example, a company offers you options at 1 cent per share and one year later the company's value rises to 1 dollar per share, you can still exercise your options at 1 cent per share.
If the company offers you 100 options with a $1 strike price, it will cost you $100 to purchase all the options. You do not have to purchase all of them, you can purchase any amount you want.
Vesting Commencement Date
This is when your vesting schedule starts. Vesting is the process of slowly getting access to the options you've been offered. You typically do not get to exercise your options immediately since you have to earn them by staying with the company.
Vesting/Exercise Schedule
This is important, it tells you how you will unlock your options over time. A typical startup will use the 4 year, 1 year cliff vesting schedule.
It will take 4 years for your to earn 100% of the options in your agreement.
The 1 year cliff means you will not earn any until you stay with the company for at least 1 year. At that point, you will earn 25% of the options in your agreement.
The cliff is a protection for the company so people do not just join and leave within a year just to get access to options.
Termination Period
While most options grants wont expire for 10 years, there are some cases where the options agreement can be terminated prematurely. Here are some common ones:
- If you leave the company (not fired), you will typically have a shorter period to decide whether you want to purchase or not. It's fairly common to see something close to 90 days.
- If you are fired, aka termination for cause, your situation will depend on your relationship with the company.
- If you die, you may see something close to 1 year where a beneficiary can exercise it.
- If you become disabled and can no longer work, you may have up to a year. You'll need to look at your own paperwork.
There are other cases but these are some common ones.
Transferability
In most cases, you cannot transfer your options.
Lock-Up Agreement
If your company ends up with an IPO, congratulations! You may be subject to a lock-up period in which you may be stuck in a period where you cannot do anything with your options / shares. This is typically to protect the newly IPO'd company from seeing a large outflow due to employee's cashing out.
Conclusion
Just remember that you do not have to exercise your options immediately, you have until the expiration date to decide. If you're terminated for some reason, your timeline to decide may be shortened.