Whether you’ve just been hired or finally received a much-deserved promotion, the scene is usually the same:
You check your email inbox and see your stock option plan and agreement documents. You open the files and see over 20 pages of legal definitions and clauses. The further you scroll down, the more lost and overwhelmed you feel. Finally, as you reach the end, you see a place for you to sign and date. You’re not exactly sure what “accepting” the agreement means, but you think that the quicker you sign the document, the quicker you will receive your stock options. And that means more money, right? Before you start daydreaming about quitting your job to travel the world and early retirement, let’s take a look at the steps and documents involved in receiving stock options.
This article refers to employees receiving stock options from privately-held companies.
While all companies have their own process, here is the typical timeline, documents, and terms involved in your stock option grant:
Offer or Promotion Letter
Congratulations! After months of job hunting and rounds of interviews, you’ve finally received an offer letter from the hiring manager. Or maybe your annual performance review went very well, and you were finally given that promotion you’d hoped for. While you are quickly scanning to see what your new annual salary and bonus are, be sure not to overlook the stock options section. You will likely see a sentence stating “In addition, subject to the approval of the Company’s Board of Directors, you will be granted X shares of option grants of the Company..”
While it is very exciting to be granted stock options, understand that you haven’t actually been granted anything yet.
Board Approval
The next important step is receiving Board Approval. After you receive your offer or promotion letter, your company’s Board of Directors will need to meet to approve your stock option grant. This is usually documented in the board meeting minutes or by unanimous written consent of the board. Since companies need to update their 409A valuation every 12 months, or sooner if they receive a new round of funding, it is common for the Board to finalize the exact details of your grant at the next Board meeting. Your official grant date and exercise price will be determined by the Board.
Remember, until your grant is approved by the Board, you are not entitled to any stock options.
Stock Option Plan
Once your options are approved by the Board, one of the first documents you will receive is the Stock Option Plan. This is the governing document for the company’s issuance of stock options. It usually contains the terms and conditions of the options to be granted, including the purchase price and any limitations.
This is usually a standard document for all options issued to employees at the same time.
Stock Option Agreement
The second (and most important) document you will receive is the Stock Option Agreement. This is a personalized contract between you and your company. This document specifies your grant date, type of options granted, exercise price, vesting schedule, and other employee-specific terms of issuance.
Some key terms to pay attention to in the agreement are:
Number of options granted – The number of shares that you will have the option to exercise
Grant Date – The date which your employer granted you the options
Vesting Commencement Date – The date when your options vesting period begins
Vesting Schedule – The schedule at which your stock options will become eligible for you to exercise
Exercise or Strike Price – The price that you will have to pay per share in order to exercise the option
Expiration Date – The date on which your exercise period ends, and you will no longer be able to exercise the shares
Early Exercise Provision – A feature where employees are eligible to exercise their shares before they are fully vested
This is the document that you will need to sign in order to officially accept your stock grant.
Stock Options Issued
Once your stock options are issued, you will likely receive an invitation to your equity management portal, like Carta or Shareworks. It is also common for you to use these portals to review and accept your future stock option grants.
You can use this portal to track your various stock option grants, the number of shares granted, how many shares have vested, and what your exercise price is. You may also be able to utilize this portal to exercise your options.
Vesting Schedule
Once your stock options have been issued to you, they will immediately begin vesting. Vesting refers to the amount of time you must stay with your employer before you are eligible to exercise the options. Common vesting schedules include a 1-year cliff, and then monthly or quarterly vesting going forward.
Need help understanding or evaluating your grant award letter? Have your options already vested and you aren’t sure what to do next? If you would like to work with a financial planner to walk you through your options, I would love to help you!
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Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.