“Employee Equity”, 2014-04-18 (; backlinks):
…Option pools are complete fiction; boards can increase them whenever they want. It should never be used as a reason for not making a grant.
Problem 2: If an employee leaves the company, he or she often can’t afford to exercise and pay taxes on their options.
Solution: Most employees only have 90 days after they leave a job to exercise their options. Unfortunately, this requires money to cover the strike price and the tax bill due for the year of exercise (which is calculated on the difference between the strike and the current FMV). This is often more cash than an employee has, and so the employee often has to choose between walking away from vested options he or she can’t afford to exercise, or being locked into staying at the company. It’s a particularly bad situation when an employee gets terminated.
This doesn’t seem fair. The best solution I have heard is from Adam D’Angelo at Quora. The idea is to grant options that are exercisable for 10 years from the grant date, which should cover nearly all cases (ie. the company will probably either go public, get acquired, or die in that time frame, and so either the employee will have the liquidity to exercise or it won’t matter.) There are some tricky issues around this—for example, the options will automatically convert from ISOs to NSOs 3 months after employment terminates (if applicable) but it’s still far better than just losing the assets. I think this is a policy all startups should adopt.
As an aside, some companies [like Altman’s OpenAI] now write in a repurchase right on vested shares at the current common price when an employee leaves. It’s fine if the company wants to offer to repurchase the shares, but it’s horrible for the company to be able to demand this.
…First, I think employee stock and options should usually not be transferable. It causes considerable problems for companies when employees sell their stock or options, or pledge them against a loan, or design any other transaction where they agree to potentially let someone else have their shares or proceeds from their shares in the future in exchange for money today.
I think it’s fair that if founders sell stock, they should offer an opportunity to employees that have been at the company for more than a certain number of years to sell some portion of their shares. And some companies offer an employee liquidity program even when the founders don’t sell any shares themselves. But otherwise, I think it’s reasonable for employees to wait for an acquisition or IPO.
[But even in 2014, startups were staying private for increasingly long periods like decades…]
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