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Intro
Congratulations! You’ve landed a job with a hot new company based in the US. You’ve done some reading and know that one of the most advantageous things about working for early- and growth-stage startup companies is that they are quick to make you feel like one of the team—and one of the key ways they do that is with equity.
But before you sign your offer or intent letter, take time to consider some crucial details, and ask some important questions. These can help you navigate the complex and acronym-crowded world of equity compensation and how it relates to you.
At Easop we’re hyper-focused on remote/non-US equity, and here are the top questions you should ask the company about your equity.
What kind of stock options will I receive?
If you live abroad, chances are that you’ll get Non-Qualified Stock Options (NSOs) since Incentive Stock Options (ISOs) are only meant for US tax residents.
Stock options are the opportunity to purchase stock in the company once the options you’ve been granted have vested. These shares are offered at a price which gives team members an opportunity to own company stock at a more economical price when they exercise their options, if the company’s valuation has increased since the time they were granted the options.
The incentive for the employee lies in the opportunity down the road to sell those options for profit in the scenario that the company’s stock price increases and that an exit event, a liquidity program or an IPO occurs.
If you live in a country where there are specific types of tax-favored instruments (e.g. BSPCE in France or EMI in the UK), of where there are certain tax advantages if certain conditions are met (e.g. Belgium, Estonia, Lithuania or Spain), make sure to ask if the options will be tax-favored.
Whatever the options, ask the hiring manager to confirm that they will be granted for free (i.e., that you’ll not have to pay for the option themselves, but only for the shares in case you decide to exercise). Options are almost invariably granted for free.
What is the strike price, and what is the price per share (PPS)?
One of the important numbers you’ll want to know is the strike price. Also known as the exercise price, this is what you’ll have to pay per share when you exercise your options.
This is often determined by the 409A valuation, an independent appraisal of the company’s fair market value (FMV), performed by a certified valuator. Some companies may also want to provide for a higher strike price for certain categories of service providers (e.g., for occasional advisors), but it’s definitely not common practice.
Make sure you ask whether the strike price is not higher than the FMV at the grant date. If not, and unless it stems from a legal requirement, this could be a sign that the company does not have an employee-friendly approach when it comes to equity!
The second number that becomes important then, is the price per share (PPS). This is the price that investors pay when they invest in the company during a funding round. It will always be greater than the FMV, for two main reasons.
First, the investors are investing, not in today’s valuation, but in the value they see the company having in the future.
Second, because the shares they get in exchange for their investment are preferred shares, which carry rights such as liquidation preference, preferred voting rights, anti-dilution and other protective rights that common shares (held by founders and employees) don’t have. In case the company get sold at a price which is not high enough, investors will be paid back first, with holders of common shares (i.e., the employees’ shares) potentially not receiving anything.
The difference between the strike price (based on the FMV at grant) and the PPS (based on the latest financing round valuation) shows what the team member stands to gain. So when presented with a dollar value of what your equity is supposedly worth, make sure you ask how it’s been calculated: is it by reference to the PPS paid by investors (in which case you know that in reality the value is likely overstated). Or is it by reference to the FMV on the basis of a 409A valuation (in which case you know that it’s potentially a bit higher than that). The truth probably lies somewhere in the middle. Remember that option valuation is tricky and, to a large extent, virtual.
What’s the vesting schedule, and what’s my cliff?
When it comes to equity, the time between the grant date (often, aligned with when your employment begins) and the time at which you’re entitled to exercise is called a vesting schedule. This schedule is important to understand because it’s the time period you need to typically work at a company in order to be able to exercise your options.
This schedule often comes with a first milestone called a cliff. For example, a 4-year vesting schedule with a 1-year cliff is pretty standard for employee stock options at a startup. That means you have to work at the startup for one year before even a portion of your options vest. If you leave at month 13, you get 25% of your options. Leave after three years and you get 75%, and so on.
If the company deviates from a regular vesting schedule, don’t hesitate to ask why they’ve decided to do so.
How and when will I be taxed?
You may have been issued stock instead of cash, but regardless of the type of stock options that you’ve received, the laws of your country of residence and the type of professional relationship you have with the company, remember that you will have to pay taxes at some point!
Sometimes (but rarely), options will be taxed at the time of grant, especially in the unlikely events where the exercise price is lower than the fair market value at the time of grant.
More often, options will be taxed at the time of exercise. The difference between the FMV of the shares at exercise and the strike price (plus any additional price paid for obtaining the options) will typically be taxed as professional income.
At sale of the shares, the difference between the sale price and the fair market value of the shares at exercise will often be taxed as capital gain, which usually benefit from a lower taxation rate compared to professional income.
Ask the hiring manager for information on your tax treatment. If the company subscribes to Easop, it’s very likely that they will have the right information for you.
Is my equity package different than US-based employees, or employees based in other countries under another status?
Many companies have standard percentages, but it may be possible to negotiate the equity compensation portion of your offer. Once you know your percentage, you can gauge how you stack up against your coworkers, and hopefully feel like you’re an equally valued member of the company. There’s always room to negotiate, especially at startups.
You could ask whether the company has taken your location (and cost of living), and your local taxes into account as a way to tailor your equity package. If you’ve been hired by the company through an employer of record such as Oyster, Deel or Remote, chances are that you cannot benefit from a local favorable taxation compared to US employees or employees employed by a local subsidiary in a country where there’s a tax-favored scheme. You could mention that to try to beef up your equity grant.
How can I eventually sell my shares?
Options are worth nothing if you cannot sell the shares you will have acquired when you exercise, and you aren’t working for a listed company so this question is paramount!
Ask what the exit prospects are (who are the potential buyers, what’s the exit timeline) and, if exit is still a long way ahead, whether the company intends to put in place some kind of liquidity program whether through platforms like CartaX or through a more classic company buy-back program.
What happens to my unvested options if the company is acquired?
Perhaps the better question is, is there an acceleration clause in my grant? When a company is acquired, there is often a question for the original team members of whether to stay at the company or whether to depart–and not all employees get the same treatment. This is where acceleration of vesting comes in.
Acceleration of vesting is a more immediate ability to exercise options upon an acquisition. Acceleration is characterized by single-trigger and double-trigger. Let’s briefly break them down.
- Single-trigger: when it’s a singular event (i.e., usually the acquisition) that triggers an acceleration of vesting. This is nice for the team member, but it can feel disadvantageous to the acquirer because people who are often essential to the company being acquired and for the post acquisition phase will be more tempted to leave it.
- Double-trigger: an acceleration triggered by two events–the sale of the company, and involuntary termination of the employee, several months after closing. This protects the new holding company from having to pay out employees so quickly after acquisition, while still giving some comfort to the employees in case they’re fired after the acquisition.
- No acceleration: sometimes there is no acceleration clause in which case the team member, upon departing the company after acquisition, may only leave with the options that have vested.
Knowing how your equity will be treated in the event of an acquisition will give you a big-picture understanding of how the company is thinking about its future, and what your individual contributions will mean in the event of a sale.
How long do I have to exercise my options when I leave?
Another way to ask this is: how long is my post termination exercise period (PTEP).
When you leave the company, your equity doesn’t automatically come with you, even if your options have partially or fully vested. You must exercise the stock options if you want to own your equity, and usually companies give you a certain period of time to exercise. This is known as the post termination exercise period or PTEP.
Usually US companies give 90 days because of tax reasons that are to a large extent only relevant for US employees (so US employees can benefit from a better taxation). If you’re based abroad, you could try to challenge that and say that it’s fair to have a longer PTEP since you don’t have receive the same tax advantage as the US employees do.
Does the company plan to issue stock or raise a new round in the future?
This question will help you understand how your stock options will potentially fare in the future, and what events might increase its value. New capital means new investment. New shares are issued to investors, so that dilutes the stock, but it dilutes it for everyone—employees, founders and investors alike; all shareholders—and it also increases the valuation and the price per share.
A rising tide lifts all boats.
Equity can feel complicated and intimidating, but it doesn’t need to be. Asking your employer (or prospective employer) to be comprehensive and transparent about your equity plan will ensure that you’re able to confidently make a decision to join the team, because you know that they want you to have ownership in the shared goal.
These are questions they should easily be able to answer for you no matter where you live, and if not–they should probably contact us here at Easop for help.
