by Tom Taulli
While the tech IPO market has been somewhat subdued lately, there is still decent activity. Just some of the recent offerings include Ooma (OOMA), AppFolio (APPF) and Xactly (XTLY).
For tech employees, this highlights the importance of stock option packages, which are often the biggest part of a person’s compensation. Yet the fact is that many people really do not spend much time with negotiation — and yes, this could mean missing out on even more gains.
Then again, this situation should not be a surprise. Let’s face it, stock option packages include jargon-filled contracts — as well as complicated option plan documents.
So to get some help on this topic, I recently talked to Alon Rotem, who is the chief counsel at Rocket Lawyer. The firm is a leading provider of free legal documents and affordable legal advisory services. Before joining Rocket Lawyer, Alon was a lawyer at Goodwin Procter LLP, where he focused on technology companies.
OK then, what is his advice for negotiating stock option packages? Well, let’s take a look:
Number of Shares: “When an employee gets a grant for, say, 20,000 shares,” said Alon, “it seems like a lot. But it really does not mean much.”
What’s more, if you get a promotion or your role expands, then you should ask for another option grant. Oh, and in this situation, ask for a monthly vesting schedule and also get credit for the vesting you have already received for your prior stock option grant.
Vesting: This can be tough to change (at least for the initial grant). For the most part, the tech industry has set on the standard of a four-year vesting period, with a one year cliff (this means the shares do not vest until you work at the company for at least one year). The main reason is to encourage employees to stay on board the company.
But there is certainly wiggle room. For example, if you are a consultant or advisor, you should fight to get quicker vesting since your role will likely not be long-term. To this end, you may request vesting on a monthly or even daily basis. Or, you might get vested when you complete a project.
Next, if you are a full-time employee, you should think about negotiating acceleration for your option package. That is, if there is an acquisition or IPO, you will get a part or all of your options immediately vested. This can be critically important because of the possibility of layoffs.
Exercise Price: This is becoming a big deal in the tech world. The exercise price — which is what you pay for the shares when they are vested — can be at high levels because of the aggressive funding rounds in the Valley. In other words, you may have a tough time coming up with the cash to exercise your option!
However, forget about negotiating the exercise price. Because of legal and accounting reasons, this is really impossible.
Although, the exercise of an option is often for when you leave the company or there is a liquidity event, such as an acquisition or IPO. But there will likely be a way to get the financing to make the purchase of the shares. In some cases, the employer will provide a loan or there may be financing from third-party lenders or investors. Or, you might want to consider getting a home equity loan.
But as with any major financial move, be careful. As seen with once high-flying companies, like Fab.com and HomeJoy, a tech company can quickly implode. And if you borrowed money to buy shares, you could be in a financial mess.
Advice: No doubt, the issues with stock options can get complicated. So if you have any questions, it’s definitely smart to get advice, such as from a qualified attorney. While this can be expensive, there are affordable alternatives, such as Rocket Lawyer. There are also free resources that can provide how-to’s and interactive tools, such as OptionExercise.com.
Tom Taulli (@ttaulli) is an Enrolled Agent (EA) who is admitted to represent taxpayers within the IRS and prepare tax returns. He also operates OptionTaxes.com, which provides services and interactive online tools for employee stock options.