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Why transparency matters.
Also known as the exercise price, the strike price is one of the first key metrics that shape your option pool, and one of the most visible aspects of your equity incentives to employees. It shows up in offer letters as you draw talent to your ranks, and with it a whole lot of questions and assumptions are made.
So when determining the strike price following a 409A valuation, there are some implications to consider. An important one—that’s not often discussed—is that the material worth of your company stock tells candidates and team members not just that you want them invested in what you’ve built thus far, but that greater things are in store. And your hiring team should be ready to make that clear.
What is, and what could be.
When stock options are part of the compensation structure, it’s important for hiring managers to be well-versed in the ins and outs of the equity portion of the benefits package. This ensures that candidates and team members understand their role in the event that they get to exercise their options after they have vested, and when they potentially sell their shares.
This builds an innate sense of ownership, and helps them envision success at the company level, as well as in their own personal career. By laying out clearly where the company sits in the market and competitive landscape, they can see what they stand to gain, making them likelier to sign on.
Be ready to talk terms and taxes.
“15,000 shares with a strike price of $1, plus a four-year vesting period and one-year cliff”
This sounds straightforward in an offer letter, but hiring managers shouldn’t assume that the figures specific to the incentive don’t matter to candidates. Instead they should be ready to address more technical questions, and be transparent about the costs involved in eventually exercising their options, as well as the conditions around the employees’ departure. Some questions may, for instance, arise around:
- What is the company’s current valuation?
- How was the exercise price determined (i.e., most of the time, on the basis of the most current 409A valuation that established the value of the shares of Common Stock)?
- How does the price paid by investors in the latest funding round compare with the price the employees will have to pay to exercise their options?
- What type of stock is given to the employees and what’s the difference between the employee’s stock and the investors’ stock?
- How long do they have to exercise their options if and when they leave the company voluntarily or involuntarily (also known as Post Termination Exercise Period (PTEP))?
- When they will be taxed and on what amount?, and
- Whether they will be able to sell their shares, when they can do so, and to whom?
- Is it better to exercise sooner or later?
Taxes and compliance can be especially confusing as they vary from state to state, country to country, and according to the type of work relationship between the person receiving the options and the company. A platform like Easop can streamline this information for you and your team members wherever they may be based.
Clearly and comprehensively articulating numbers and details related to their equity will show the candidate that you consider their hiring to be a shrewd business move and strategic to the long term success of the business.
Making equity and ownership accessible.
Startup employees come to these companies because they welcome the transparency and collaboration of a ground-floor environment. They expect to understand the ins and outs of how the business works, how their job contributes to the larger goal, and how that contribution is valued.
Savvy hiring managers will work to ensure that prospects and current team members have a strong understanding of what the equity incentive entails, and everything that goes into exercising their options.
At Easop, we’ve streamlined this entire process to be part of your equity management apparatus so team members in 70+ countries can have a full view of their benefits and how they can grow with the company.
