Option Grants Workbook
At S3 Ventures, we generally recommend that most, if not all, full-time employees in our portfolio – from CEOs to individual contributors – receive stock options as part of their compensation packages.
Stock options enable employees to have a stake in the company and incentivize them to work towards the common goal of generating shareholder returns – either by going public or being acquired. For some roles – especially executives – stock options also help compensate for the fact that a start-up often cannot match salaries of larger companies and may also be a riskier career / financial choice.
The mechanics of managing stock option plans can often be tricky. They require solid documentation, an attention to detail, and clear communications with employees, shareholders, and the Board of Directors. Here, we will be focusing on communications with your Board of Directors.
Stock Options & Your Board of Directors
As part of its governance responsibilities, a company’s shareholders and Board of Directors (BoD) oversee the authorizing and granting of stock options by approving the following:
Employee Stock Option Plan (ESOP) – This legal document enables the issuance of stock options to a company’s service providers (employees, advisors, board members, contractors, etc.) – setting forth the amount of options authorized for issuance and describing how these options will be structured – including features like vesting, exercise period, etc.
Stock Option Pool – A company should not grant options for which common stock has not already been authorized. Therefore, shareholders and/or the BoD must ensure enough common securities have been authorized to cover each stock option issued and approve the ESOP – which authorizes a certain number of stock options to be granted – also known as the Stock Option Pool. The shareholders and/or BoD can then expand the Stock Option Pool as needed – often in conjunction with a financing round. Once a service provider leaves a company, typically any stock options not exercised within 60-90 days of their departure will be forfeited and returned to the Stock Option Pool, making them available to be granted to another service provider.
409A Valuation / Strike Price – So that an employee does not have taxable income related to a stock option grant, companies periodically conduct 409A valuations – where a third party calculates the fair market value of the company’s Common Stock. This value is then used as the strike price for future option grants. 409As are usually conducted annually or soon after a significant event – like a financing – where the valuation of the company may have materially changed.
Stock Option Policy – To ensure that the company grants options in a consistent and intentional manner, a BoD may also want to review and/or approve a Stock Option Policy. The policy defines pre-approved parameters (grant size, vesting period, etc.) for each level of new hire (i.e., C-level, VP, Director, Manager, individual contributor), independent board members, and advisors. Exceptions to these parameters can be made on a case-by-case basis, but significant exceptions are generally limited to executives and should prompt a broader board discussion about the individual grant.
Option Budget - An Option Budget often accompanies an annual operating plan and forecasts how options are likely to be granted over the next 12 months. This exercise ensures that a company’s hiring and retention plans do not call for more options than are available in its Stock Option Pool. The budget also serves as a way for management and the board to review how grants have been distributed in the past and correct any imbalances.
Option Grants – The details of every stock option grant (grantee, number of options, strike price, vesting, etc.) must be approved by the BoD. Therefore, grant approvals are a recurring agenda item at each board meeting and documented in the meeting minutes.
Download: Option Grants Workbook
To help our companies manage their stock option communications with the BoD, we have developed an Option Grants Workbook – which contains the following template worksheets:
Option Policy Matrix – A table for documenting the company's current option grant policy (size range and vesting schedule) for various levels of new hires, independent board members, and advisors.
Option Budget – A table for tracking and forecasting total number of shares (and FD%) granted to individuals out of a company's option pool.
Board Option Grant Approvals – A template for presenting proposed option grants to Board of Directors and for inclusion in board meeting packets / minutes.
This workbook is NOT intended to be an Option Ledger that tracks option vesting, pricing, or exercise details – as such information is best stored alongside a separate Capitalization Table workbook or in Equity Management software (like Carta).
If you have suggestions on improving the template, please contact us.
These materials and the information provided herein are (i) for informational and discussion purposes only and are not intended to be, and shall not be regarded or construed as, a recommendation for a transaction or investment or financial, tax, legal, or other advice of any kind, and (ii) subject to various disclaimers and limitations that are set forth in our Terms of Use. By accessing these materials and the information provided herein, you agree to our Terms of Use, including, without limitation, all of the disclaimers and limitations set forth therein.
Last updated: Jan. 2021