Snapchat employee stock options
This post presents our current recommendation for how tech startups should structure employee stock incentive programs. I recently wrote a post about the potential issues associated with switching from a day post-employment exercise period to a year exercise period for employee stock option grants. While the goal of that post was to surface a number of considerations founders should take into account if contemplating such a switch, many people interpreted the post as a statement against year exercise periods. This was not our intention, so I want to be clear about our overall position as a firm. So, we propose an option program here that includes year exercise periods, and we encourage founders to consider a comprehensive program that aims to address the following issues that may then result from that:. Here is a stock option plan that employee believe offers the fairer year exercise period, while also mitigating the consequences of the above issues:. As noted above, however, under current law, this would mean that all options would be non-quals not ISOs. Back-end loaded stock vesting By using a back-end snapchat vesting schedule, you greatly mitigate incentives to quit. In lieu of a back-end loaded vesting schedule, companies may also consider minimum tenure requirements for the year exercise window to kick in or a sliding scale where time to exercise increases with employee tenure. Transfer restrictions Strong stock transfer restrictions will protect the company, its employees, and its ex-employees from any potential hazards associated with secondary selling. An 83 b election allows an employee to early-exercise her options even before they have vested. The employee comes out of pocket for the cost of the exercise price why this solution works for early stage companies only, where the common stock valuation is very low but does not owe any taxes this is because the exercise price and the fair market value of the stock are equal. An 83 b election also confers another tax benefit: But we encourage the use of the 83 b mechanism for early employees. RSUs thus not only help solve the year exercise problem as long as they are structured properly, there are no taxes at the time of vestingbut they also sidestep other issues such as stock-price fluctuations that could cause options to go underwater and be worthless. The decision to adopt a year exercise program, as with all aspects of a compensation stock, is highly company-specific; each company should go through its own idea-maze for what plan best suits its overall culture and goals. For example, as a hardware company where long-term knowledge about infrastructure matters, Tesla may value longer tenure than other companies and thus might design a program around this specific goal. And whatever plan you choose, it is likely to morph over time as the environment changes. For example, there is a proposed bill in Congress right now the Warner-Heller Bill that would solve one half of the current option problem — by deferring for up to 7 years the taxes owed options a private company employee at the time of option exercise. While this bill is in the early stages of making its way through Congress, the point is that stock situation is highly fluid so make sure your plans can accommodate any such policy changes. The broader liquidity environment will play a role as well in how long the exercise period should be. We are here because companies snapchat choosing to stay private significantly longer than the time period for which the 4-year option vesting program was originally designed. So, this current recommendation works in an environment where time to IPO is about 10 years. To the extent this time period shrinks, founders may want to move to a shorter period more closely tied to the average time to liquidity. Most importantly, no matter what plan you implement, be completely transparent with employees — at the time of hiring — about all of the issues surrounding your compensation program. Among the employee I received on the earlier post, I was struck by how many employees felt the day option expiration window was never mentioned to them when they joined the company and thus was a complete surprise when they first learned about it at exit. If hiring managers are failing to be clear and transparent with employees about any aspect options compensation, this is an enormous mistake that fundamentally compromises trust between employer and employee. The existing plans, while flawed, have been around for many decades, so the issues are well known. New plans will surely generate new issues, so design your plan carefully and to be consistent with the goals and company culture you want to foster. Skip to content Software Is Eating the World. So, we propose an option program here that includes year exercise stock, and we encourage founders to consider a comprehensive program that aims to address the following issues that may then result from that: Inadvertently incentivizing employees to quit — If an employee has been at your company for, say, 2 years and has the opportunity to join a new company, she has an interesting financial decision to make. If she stays at the company and it fails, she loses everything. If she leaves and your company succeeds, her upside is protected by the year option to exercise 2 years of options plus she protects her downside by acquiring stock in a new company. Potentially creating legal risks for ex-employees — Since companies are staying private longer, ex-employees who want liquidity may turn to the private secondary market to snapchat their stock or pledge their options to a third party. This risk exists in a day exercise program as well, but it becomes a lot more acute when you move to year exercise periods. Making critical shareholder votes more difficult — When you need to make changes that require approval of the common shareholders, you will now have many more shareholders to track down. Shareholder votes can impact critically important situations such as acquisition offers, new share authorizations to issue options to employees! If you have to round up thousands of shareholders to take corporate actions, your job as CEO becomes much more difficult. Slowing down these kinds of transactions may put the transactions and potentially your company at risk. Inferior tax treatment for employees due to the difference between the two types of options that companies can grant employees, Incentive Stock Options ISOs and Non-Qualified Stock Options non-quals — ISOs have better tax employee for employees because the employee does not have to pay taxes at the time of exercise on the difference between the exercise price of the option and the fair market value of the stock. Thus, the employee will receive the less options tax treatment under the longer exercise period. Here is a stock option plan that we believe offers the fairer year exercise period, while also mitigating the consequences of the above issues: Closing considerations The decision to adopt a year exercise program, as with all aspects of a compensation strategy, is highly company-specific; each company should go through its own idea-maze for what plan best suits its overall culture and goals. So, there is no one-size-fits-all approach. 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