𝗦𝗵𝗮𝗿𝗶𝗻𝗴 𝗘𝗾𝘂𝗶𝘁𝘆 𝗟𝗲𝗮𝗱𝘀 𝘁𝗼 𝗩𝗮𝗹𝘂𝗲
𝙂𝙞𝙫𝙚 𝙢𝙚 𝙖 𝙡𝙚𝙫𝙚𝙧 𝙡𝙤𝙣𝙜 𝙚𝙣𝙤𝙪𝙜𝙝 𝙖𝙣𝙙 𝙖 𝙛𝙪𝙡𝙘𝙧𝙪𝙢 𝙩𝙤 𝙥𝙡𝙖𝙘𝙚 𝙞𝙩, 𝙖𝙣𝙙 𝙄 𝙨𝙝𝙖𝙡𝙡 𝙢𝙤𝙫𝙚 𝙩𝙝𝙚 𝙬𝙤𝙧𝙡𝙙. – 𝘼𝙧𝙘𝙝𝙞𝙢𝙚𝙙𝙚𝙨
In building your dreams, you want to retain equity for a winning exit. At the same time, the talent (and fundraising*) needed to amplify growth will demand equity.
If he were an entrepreneur, stock options may be the lever Archimedes sought to attract and retain the contributors for success.
By offering a share of the anticipated upside, options align motivation and goals in the pursuit of moving the world.
Note: This post should not be used as legal or tax advice. Seek expert opinions for your specific needs.
𝟱 𝗧𝗵𝗶𝗻𝗴𝘀 𝗳𝗼𝗿 𝗙𝗼𝘂𝗻𝗱𝗲𝗿𝘀 𝘁𝗼 𝗞𝗻𝗼𝘄 𝗮𝗯𝗼𝘂𝘁 𝗦𝘁𝗼𝗰𝗸 𝗢𝗽𝘁𝗶𝗼𝗻𝘀
𝘊𝘰𝘮𝘱𝘦𝘵𝘪𝘯𝘨 𝘧𝘰𝘳 𝘛𝘢𝘭𝘦𝘯𝘵 – Stock options align incentives and behaviors (creation, motivation, and savings) to attract valuable contributors.
When deciding on both the overall and individual grant size, create a consistent system and then gauge each role’s contribution. Most founders set from 10% - 15% equity to engage valuable talent.
𝘝𝘦𝘴𝘵𝘪𝘯𝘨 – Building a vesting schedule encourages both contribution and retention over many years.
The typical cliff on the first year gives enough time to make sure the person is contributing and can be part of your long-term plans. Consider a second tranche for employees when their original vesting schedule ends or if their contribution vastly exceeds expectations.
𝘙𝘦𝘸𝘢𝘳𝘥𝘴 – When introducing a stock option plan, be clear about what you are offering. There are some good guides available.*
Share updates about the company’s achievements and challenges so others see themselves as owners in the company's success. Also, know that the type of grant is important, e.g. ISOs give tax incentives over NSOs.
𝘚𝘦𝘤𝘵𝘪𝘰𝘯 83(𝘣) – A Section 83(b) election allows someone receiving restricted stock and stock options to potentially save a lot in taxes.
The recipient elects to pay taxes based on the fair market value of the company now instead of when the options vest (e.g. an exit). To participate, let the IRS know by sending the 83(b) document and pay the appropriate taxes within 30 days of receiving the options.
Note: the options could be worth a lot more but also you could lose money here, so seek guidance.
𝘛𝘦𝘳𝘮𝘪𝘯𝘢𝘵𝘪𝘰𝘯 – Some founders get sour the moment an employee is leaving. However, a former employee may add value again.
If the relationship ends well, they may introduce clients, suggest new employees, and they may even want to return now more motivated. Honor past contributions and possible future engagement by listing reasonable terms for how long ex-employees can exercise options.
💸 Stock options are a strong lever when planned carefully. Start moving the world.
* Fundraising is discussed at length here: https://www.webuildscalegrow.com/post/c8810f41
** Carta offers a great guide to stock options: https://carta.com/blog/equity-101-stock-option-basics/
The "Archimedes" Portrait was painted about 1620 by Domenico Fetti in Mantua. https://archimedes2.mpiwg-berlin.mpg.de/archimedes_templates/popup.htm