Day 4- Startup Stock Options

15 May

One of the most important tools a start-up has in it’s arsenal is it’s pool. And I am not talking about the one filled with H20, although that’s a real possibility, if you utilize the option pool correctly. Options are typically set aside to incentivize key hires and star personalities you want involved in your business.  They offer an upside in the business and don’t require the founders limited supply of funds. Just like an option on the public market, private market options are a contract between two parties, specifying a price the options can be purchased for at an agreed upon later date. A vesting schedule serves to restrict when the holder of an option can cash out. So if you are granted 100k options, a typical schedule may dictate 1/4 of your options can be exercised after year 1, another quarter in year 2 and so on. This ensures alignment and continuity in a business…if you jump ship and leave for another company, your vested options will expire worthless.

An options value is tied to the total number of options issued. So you should ask the total size of the option pool when your are offered them, and then simply divide your share to calculate % ownership. Keep in mind, as a founder, options are dillutive to your founders shares, but only when/if they are exercised.

 

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