We want to build this company together. That’s why employee stock options are so important to us as part of any of our teammate's compensation.
What is ESO?
Employee Stock Options (ESO) is a future contract between an employee and the company, many times with added taxation benefits, that give the employee the right to buy company stock at a great discount. In laymen's terms, it gives you the ability to buy 1$ worth of stocks at less than 1$. Let’s dig deeper into some of those terms, and do a quick simulation to see how it works.
How do we calculate offer of ESO?
Prior to joining the company, you'll get 3 offers as part of our offer simulation (read more about that
The offer is based on a percent number, and on the contract, the number of stock is being calculated to resemble the percent number that was selected from the offer.
Our usual offer is based on the methodology above with 4 years for full vesting, and a 1-year cliff, and quarterly vesting.
So how does that work?
The easiest way to grasp how options work is with an example.
Let’s say you joined on day 1 of the company and were offered 10,000 options for the exercise price of $0.001 per stock, At that time company stock was valued at $1. (this is a rather common practice unless Fair Market Value is relevant in your country) This means you got extra compensation worth 10,000 * $1 - 10,000 * $0.001 = $10,000 - $10 = $9,990 as extra compensation. In 4 years’ time, the company is sold (means you’re able to convert stock to $) event while the company stock is valued at $142. So the total compensation in that time is worth 10,000 * $142 - 10,000 * $0.001 = $142,000 - $10 = $141,990 as extra compensation.
It’s easy to see that as the company grows the extra compensation can grow and be very significant. Now that we know a bit about how it works, let’s dive into some more “advanced” concepts.
Full Vesting Time - The time it takes to gain all promised options, usually in years or months, after said amount of time all the options are available to purchase.
Vesting Period - The time it takes to gain incremental options, usually in months, or quarters, means every month/quarter you gain x more options that are yours to buy.
Cliff - Options have a minimal “waiting” time, this is represented as a cliff, usually a year. It means the first year no options are gained, but after a year you'll get a year's worth of options you can buy and from here it's based on the Vesting Period.
Liquidation - A fancy word that means that an event happened and now you can sell your stock for its cash value. Most usually in startups, it’s an acquisition of the company or an IPO.
Stock Value - When dealing with private company stock price based on the most frequent company valuation, and the amount of total stock in the company.
Exercise Price - How much it cost to convert options into stocks, most usually price is lower than the Stock Value, which makes it a financial benefit.
Post Employment - In cases you left the company prior to any Liquidation event, but you do want to buy the options already available, usually you have 1-3 months buy your options, afterwards the the options are returned to the company options pool.