This guide covers options plans, how much equity to offer, creating terms, and long-term strategies. It includes a model example and resource appendix.
Part I: Intro to Options Plans
- What is an ESOP?
- What is an Option?
- Lifecycle of a Startup ESOP
- Common Terms in an Options Package
- Why Issue Options to Employees?
- A Defining Characteristic of Startup Culture
- A Necessary Part of the Capital Structure
- When to Create an ESOP?
- Communicating Options to Employees: % versus $
Part II: How Much to Grant
- Two Approaches
- The Top-Down Process
- How Much Equity to Set Aside in the ESOP?
- A Typical Distribution Schedule
- The Bottom-Up Process
- Segment Your Human Resources
- Establish Pay Multipliers for Each Role
- Determine the Dollar Value of the Options Grant
- Determine the Current Share Price
- Calculate the Options Grant
- An Example: Hiring a CTO
- Important Takeaways
Part III: The Fine Print – Terms
- Strike Price
- Vesting Schedule
- The Cliff
- Example: Standard Vesting w/ a Cliff
- Vesting in a Liquidity Event
- Exercising Options
- Tax Considerations
- Legal Advice
Part IV: ESOPs for the Long Term
- Retention Grants
- Discretionary Grants
- Social Impact Considerations
- Options Modeling – Overview
- Options Modeling – A Detailed Example