US Corporate Law 20 Episodes (4)

How to understand your options contract? How does the four-year option play out? What does 1/48 of each month after 25% in the first year mean? What do grant, vest, exercise in options mean? Does the option wait for four years and everything will be fine?

In the last issue, we talked about some framework concepts of option pools. In this issue, we will talk about how to understand you in detail. option contract.

Many people don't know how to use the options after they get them, thinking that as long as they work diligently in the company and stay for four years, everything will be fine. In fact, there is a lot of deep knowledge here.

Here we take the first page of an employee option contract and talk about a few key concepts. Of course, the specific numbers and names are all compiled by me, not customer information.

First of all, the Board Approval Date is the time when the board of directors approves. As mentioned earlier, the establishment of the option pool requires the approval of the shareholders' meeting, and the specific options issued to each person require the approval of the board of directors.

Then there is the Date of Grant, which is often the same as the board approval time, which is when you get the option contract. Note that it is the time when the option contract is obtained, not the time when the option is obtained.

Next is an exercise price per share exercise price per share, which we will talk about later.

The following total number of shares granted grants the total number of shares, which is nothing to talk about, it is the option of how many shares the company intends to issue to you.

Then there is a type of option option. There are two kinds of ISO and NSO. They have many differences in details. You can talk about it in one issue. Today we will only talk about the most intuitive difference, that is, ISO is for company employees. Yes, NSO is for directors and advisors.

Then, the interesting thing comes, let's talk about the two concepts of Vesting Commencement Date and Vesting Schedule. The key word in it is the vest.

First of all, what is the difference between the three concepts of grant, vest and exercise? In Chinese translation, grant means grant, vest means attribution, and exercise means exercise. As mentioned earlier, the date of grant is generally when the employee signs the option contract, the company board approves these options, and the company intends to give these options to you. But in fact, the options are not yours at this time, only when the vest vests, the options are yours. And this vest is divided into four years. In our general industry, it is called four years with one year cliff, and the four-year period includes one year cliff. What's going on with this cliff is that you get 25% in the first year, and then get 1/48 every month.

Every time I talk about this place, someone will say that 1/48 of a month is 25% of the year? Why divide the first year and the next three years. It should be noted that this first year is not a one-day option for you to stay in the company for one day, but the company gives you 25% when you stay for one year. If you stay for 11 months and leave, then nothing. That's why the first year is called cliff cliff. And starting from the second year, if you work in the company for one month and get 1/48, then if you work for 13 months, it is 25% + 1/48. The difference is still very big.

It can also be seen from this design that the company is doing this to retain employees, so that employees can work hard for a year before they want to change jobs.

Of course, the one-year cliff of the four-year option is not absolute. We have also seen in practice, such as a two-year cliff with a six-month period, and a four-year period with a two-year cliff, all of which are possible. It's just that the more common is this kind of four-year-term one-year cliff. This way of collocation is called a vesting schedule.

Then the corresponding vesting commencement date is when the four years will start to be counted. Under normal circumstances, the calculation starts at the same time as the grant time, but there are also earlier or later delays. It is more common to sign the contract in advance, for example, on January 1, 2020, but in fact, this old employee has already started working for the company in 2019, and the company has also verbally promised this employee to give him options, but that At that time, the company did not have complete legal documents, and it just did not sign a contract with him, and now it is filled.

Then assuming that you have vested for four years, the options are all vested in you. You're leaving now, okay? That was still nothing. Because there is another concept called exercise, exercise. Exercising means converting your options into equity. Originally expecting the power of stocks to become real stocks, after four years of waiting, it finally came to the fore.

Exercise must be within 10 years of your grant date, and must be before you leave the company. The earlier of the two time points.

Some people will think, how can someone not have power? If you don't have the power, the four years of torment will not be in vain. It is because of the issue of exercise price per share that we didn't talk about at the beginning. When you exercise the option, you have to pay the exercise price. In the last issue, we mentioned that financial derivatives have a bid price and an exercise price. Because the purchase price of employee options is covered in the salary, the employee does not need to pay the purchase price, but you have to pay the strike price.

Take the option contract I'm showing now, for a total of 100,000 shares at 3 cents per share, the option will also cost $3,000 when it is exercised, which is also a sum of money. If you pay this money when you leave your job, you exercise your rights and become a shareholder. Later, the company does not manage well and goes bankrupt. You are equivalent to exchanging 3,000 yuan for a void stock.

And if an employee leaves, it is often because they are not optimistic about the company in the future and feel that the company's stock will not go up, so they often give up at this time. If you look at it this way, this option is not too pitiful.

When are options useful? That is, you have been working in this company, for example, you have worked until the fifth year, and the options are all obtained by the end of the fourth year. At this time, the company was acquired and sold to a large company. What used to be 3 cents a share is now 3 yuan a share, so you will make a net profit of $2.97 per share, and 100,000 shares will make 297,000 yuan, and There is no risk at this time.

However, employees who leave in the middle are often not very optimistic about the company, and this option is useless. In fact, it should be said that if the company has no future, it is impossible for all founders and investors to realize the stock, let alone one of your employees. So choose the right company, find a company that you think is more reliable and can work for a long time, and your options can be realized when the company is acquired, so that the options are really useful.

From the first issue to the fourth issue, you should find that many of the places I talked about are the differences between Chinese and American company laws, so in the next issue, we will focus on summarizing that for startup companies, Chinese and American laws are different and easy confusing place.

See you in the next issue.