Ask HN: Do I have to forfeit my options if I leave?

#1

Post by anon330 » Thu, Feb 17, 2011, 6:06 PM UTC

Hey, I'm an early employee at a startup. Due to various delays, I've been employed for almost ten months with no equity agreement in place, but the draft ESOP is now available to myself and the other employee. I have a few concerns, about which I was hoping to get some outside opinions, specifically this section:

--- 12. Termination of Employment

(a) Subject to Section 12(b) hereof, if an Optionee’s employment with the Corporation terminates for any reason other than Just Cause, any Option granted to but not exercised by such Optionee shall thereupon terminate, except that each such Option, to the extent then exercisable, may be exercised for the lesser of one (1) month from the date of termination or the balance of such Option’s term. If any portion of an Option has not vested by the date of termination, that portion of the Option may not under any circumstances be exercised by the Optionee. For greater certainty, the date upon which an Option ceases to vest and be exercisable shall be determined without reference to a “notice period” or “severance period” or any other period after notice of termination or dismissal is given. If an Optionee’s employment with the Corporation terminates for Just Cause, any Option granted to but not exercised by such Optionee shall thereupon terminate immediately. ---

I'm of the understanding that this plan is only a lightly customized version of some common template, but I'm just wondering how common this kind of lock-in is. I'm being paid (salary) about 40-50% below my market value, and this plan is supposed to represent the balance of my compensation.

I feel concerned that should I want (or need) to move on, I will be unable to, because of the substantial options I'd be walking away from. And yet, the contributions that I've made will continue to benefit the company after I was gone, if I left.

Should I be pushing back on this, or alternatively, insisting on a salary closer to what I could get elsewhere?

Thanks.

Re: Ask HN: Do I have to forfeit my options if I leave?

#2

Post by elbrodeur » Thu, Feb 17, 2011, 6:13 PM UTC

It's just saying: If you end your relationship for any other reason than Just Cause, you have one month to exercise your options. This is pretty standard. Typically a grant like this (signed late into employment) will start vesting at the date of employment, with a typical one year cliff. If that's the case you have two months before you can exercise any options. After the 1 year cliff, if you decide to leave you can exercise any options that you've vested up to that point.

Re: Ask HN: Do I have to forfeit my options if I leave?

#3

Post by anon330 » Thu, Feb 17, 2011, 6:39 PM UTC

elbrodeur wrote: post #2

It's just saying: If you end your relationship for any other reason than Just Cause, you have one month to exercise your options. This is pretty standard. Typically a grant like this (signed late into employment) will start vesting at the date of employment, with a typical one year cliff. If that's the case you have two months before you can exercise any options. After the 1 year cliff, if you decide to leave you can…

Interesting. I've been told that these options will not be convertible to cash except in the case of a buyout or IPO, etc.

Should I be ensuring that these options will vest over time, rather than all at once in case of a liquidity event, etc?

Re: Ask HN: Do I have to forfeit my options if I leave?

#4

Post by answerly » Thu, Feb 17, 2011, 6:49 PM UTC

>but I'm just wondering how common this kind of lock-in is

This is very common. One of the primary purposes of employee stock options is to create the lock-in effect you are talking about. That is why they are sometimes called "golden handcuffs".

Re: Ask HN: Do I have to forfeit my options if I leave?

#5

Post by elbrodeur » Thu, Feb 17, 2011, 7:43 PM UTC

anon330 wrote: post #3

elbrodeur wrote: post #2

It's just saying: If you end your relationship for any other reason than Just Cause, you have one month to exercise your options. This is pretty standard. Typically a grant like this (signed late into employment) will start vesting at the date of employment, with a typical one year cliff. If that's the case you have two months before you can exercise any options. After the 1 year cliff, if you decide to leave you can…

Interesting. I've been told that these options will not be convertible to cash except in the case of a buyout or IPO, etc. Should I be ensuring that these options will vest over time, rather than all at once in case of a liquidity event, etc?

Yeah, the type of shares generally given to employees are what's called common stock. Common stock can only be turned into money in a liquidity event, these days. Your common stock is not worthless, though, as each type of stock has a set of rights associated with it.

Your investors, however, and probably your founders are issued Preffered stock, which allows them to get liquidity from things other than IPO or M/A.

Re: Ask HN: Do I have to forfeit my options if I leave?

#6

Post by anon330 » Thu, Feb 17, 2011, 9:50 PM UTC

elbrodeur wrote: post #5

anon330 wrote: post #3

Earlier quoted context omitted.

Interesting. I've been told that these options will not be convertible to cash except in the case of a buyout or IPO, etc. Should I be ensuring that these options will vest over time, rather than all at once in case of a liquidity event, etc?

Yeah, the type of shares generally given to employees are what's called common stock. Common stock can only be turned into money in a liquidity event, these days. Your common stock is not worthless, though, as each type of stock has a set of rights associated with it. Your investors, however, and probably your founders are issued Preffered stock, which allows them to get liquidity from things other than IPO or M/A.

Hmm. So, just to clarify,

"After the 1 year cliff, if you decide to leave you can exercise any options that you've vested up to that point"

If the options are not cash-convertable, is that because they haven't vested, or because they've vested and aren't preferred stock?

Re: Ask HN: Do I have to forfeit my options if I leave?

#7

Post by elbrodeur » Fri, Feb 18, 2011, 3:34 AM UTC

anon330 wrote: post #6

elbrodeur wrote: post #5

Earlier quoted context omitted.

Yeah, the type of shares generally given to employees are what's called common stock. Common stock can only be turned into money in a liquidity event, these days. Your common stock is not worthless, though, as each type of stock has a set of rights associated with it. Your investors, however, and probably your founders are issued Preffered stock, which allows them to get liquidity from things other than IPO or M/A.

Hmm. So, just to clarify, "After the 1 year cliff, if you decide to leave you can exercise any options that you've vested up to that point" If the options are not cash-convertable, is that because they haven't vested, or because they've vested and aren't preferred stock?

A share is a part of the company. You are, essentially, becoming an investor. This is why companies like Google are forced to go public: They have too many employees and investors who own parts of the company, and the SEC's threshold says: "After 500 people own a portion of your company you have to go public; being private is too much of a risk to the shareholders."

So whether you get preferred (which is usually issued shortly after the investment or founding) or common, you're unlikely to see that piece of the company be worth anything until the company sells, goes public or issues dividends. In the case of a preferred shareholder, you can also get some liquidity in the event of bankruptcy or shutting the company down.

To put it simply, when you are given options, you can exercise them by purchasing them at a very low valuation. Until those shares are worth something, you can not sell them.

Re: Ask HN: Do I have to forfeit my options if I leave?

#8

Post by anon330 » Fri, Feb 18, 2011, 8:17 PM UTC

elbrodeur wrote: post #7

anon330 wrote: post #6

Earlier quoted context omitted.

Hmm. So, just to clarify, "After the 1 year cliff, if you decide to leave you can exercise any options that you've vested up to that point" If the options are not cash-convertable, is that because they haven't vested, or because they've vested and aren't preferred stock?

A share is a part of the company. You are, essentially, becoming an investor. This is why companies like Google are forced to go public: They have too many employees and investors who own parts of the company, and the SEC's threshold says: "After 500 people own a portion of your company you have to go public; being private is too much of a risk to the shareholders." So whether you get preferred (which is usually issu…

Right. I understand that these things are done to retain employees, so it's really not even remotely worth working at this company unless I'm committed to doing so for the 4 years until an exit. I guess the real thing to figure out at this point is whether I want to walk now, or stick around--- and that's basically just a function of whether the options offered are sufficient.