One thing really irks me when it comes to compensation practices — the way companies unfairly deal with employees when it comes to startup equity, especially when it is in the form of stock options. I feel even today exactly how Zach Holman felt back in 2016, and I have been feeling it way before that.
I came across this article today, I want to speak my mind a bit. The author asks an important question —
“Are you leaving money on the table?”
If you have worked at any startup and had to leave for whatever reason, this question will become very real. Often with depressing consequences for you, the employee.
I think this is the wrong question. The real question is —
“Is the company keeping your money?”
Not money exactly, but value that could become real money. So you receive an option grant when you join a company (or whenever else they grant you). And you put in the time and the effort in your job, grow the business, and in due time, you will vest your options (part of full depending on your case). But when your employment with the company comes to an end, you are forced to do one of the following:
Buy the options. But, this can have significant out of pocket expense for you. Additionally, you may have to pay taxes, even if you are not selling or cannot sell the stock. For most people, when this becomes a huge financial burden, they...
Forfeit the options. I imagine considered equity as a major component of your compensation when you took the job. And you worked hard and long for it. Now when you leave, you typically only have 90 days after you termination to buy. But for most folks, it is not sufficient time to manifest funding the cost of purchase and taxes? So what do they do? Forfeit. What a shame.
This is criminal, almost evil. It seems that most companies stock plans are optimized towards forfeiting. Check this out — Per Pitchbook, U.S. employees left behind $33 billion of unexercised options in 2021; EquityBee estimates that about $60 billion in stock option value becomes available each year and about 55% of it is not exercised.
Note that any shares that are unexercised after 90 days return to a company’s option pool and can be reissued. So all this value (forfeited by you) goes back to the company and their investors. Who wins? Not you for sure.
Sure, there is potentially a secondary market. Potentially. Several companies like Forge Global, SecFi, Liquid Stock, EquityZen, ESO Fund and others are coming up to offer secondary market services. But good luck trying to find a buyer for your company's stock, there may not be a market for it yet. And good luck trying to get your company to cooperate with these companies who most certainly will want to talk to the CFO to assess value (e.g. see your company’s 409A). So while it is great to see such companies trying to solve the employees’ problems and provide support to avoid forfeiting, it is not easy or straightforward. Many of these companies are probably in data collection and market creation stage. You might notice some kind of disclaimer on their site or ToS that says funding is not guaranteed. Your company’s stock option policy most likely includes a first right to refusal. Which means you must let them know that you intend to sell in the secondary market, and they can either buy them from you (by honoring the same or better price you get on the secondary market) or let you sell to another party.
Employers, be fair to your employees. What is fair if you issue stock options?
There are fairer solutions, but reluctance from investors and founders to take that path. Some companies are trying this out to be fair. But not enough of them do, evidently. Even a16z folks penned this back in 2016, not sure how many of their own portfolio companies adopted their advice since.
Increase Post-Termination Exercise Period (PTEP) — Give your employees longer time to exercise their vested options. They earned their vest. Change your stock plan's PTEP to 5-7 years instead of 90 days.
Provide liquidity — As founders and investors, you can take however long you need to grow the company, take it public, etc. But do provide liquidity options to your tenured employees who don’t have the privilege of waiting — consider partnering with one of the secondary markets above.
Offer RSUs instead?
Employees — educate yourself and be prepared. See some references below.
Equity is a big part of overall compensation. Know what you are signing up to when you negotiate an offer and ask those hard questions about the company’s policies including PTEP. With the excitement of taking that new job, far too many don’t think about their own exit strategy until it is too late. When it comes time to leave, make sure you know what you are leaving on the table, and whether you really want to leave it.
What do you think?
If you have questions or you’d like me to share more experiences on this or other topics, let me know.
References
Thanks to Zach Holman for this (from Jan 2016!) and this database — Startups with Extended Exercise Windows
Why 90 days of PTEP isn’t enough—for employees, or for companies — explains the background, pros and cons of a 90-day PTEP
Secondary markets: Options for options: New products emerge to help employees take control of their equity
What to do with your employee equity if you leave your startup before its IPO
Bonus read from
’s Substack —