Law for Startups: Giving Team Stock Options

This video is part five of a series of seven videos created by Anthony Rose, Founder and CEO of SeedLegals, who’d like to share his thoughts, advice, mistakes, and learnings from his extensive career in startups, so that you can avoid the same mistakes and get off to a running start when creating yours.

Summary:

The point of an options plan is to enable people to participate in the value or the outcome of the company (as it hopefully takes off). It keeps life fun, it keeps life interesting.

You may not have much cash flow and you will need to compete for talent with banks and other companies that can afford much higher salaries, how will you tempt these people to join your fledgeling startup? Of course, you could be offering a great lifestyle, one where they can work from home, where they’ve got flexi-time, great colleagues etc. but people will need something more and this is where options come into the equation.

The question is how many to give? And how to set your team’s expectations so that they’ll see this as a good thing rather than a bad thing? 

A rule of thumb for early stage rounds is to set aside 10% – 15% of your equity for your stock option’s pool. This means that if you think your team might grow to 50 people, then you will need to divide 10% (or 15%) by 50 to work out on average how much employees should get. As a starting point, you may expect to give 0.5 – 1%  to early stage employees. People who may join later will be more likely to get around 0.1%. There may be an expectation gap that needs to be addressed; “why am I only getting 0.1% or 0.5%, as the founder you have 30%? You need to explain that as a founder, not only are you not earning money but you’re also paying for the company. They don’t have the risk that you’re taking, they may have a great lifestyle, they haven’t remortgaged their house, and on top of this you are giving them a salary and some stock options.

It is important to explain how the stock options will vest. Employees need to know that if they leave tomorrow, they won’t take away the stock options that could otherwise be given to a new employee. This is the “golden handcuff”, it incentivises people to stay with the company until their options vest (although hopefully, this isn’t their only incentive!).

Trying to decide how big to make your option pool? Check out these stats on UK employee share option pool sizing.