Reflections

COMPANY COMPENSATION STRUCTURES
A strike price is simply a fixed
price at which you have a right
to buy a share once the option
has vested.
STRIKE PRICES
USING STOCK OPTIONS
ACCELERATED VESTING
A strike price is simply a fixed price at which you have a right to
buy a share once the option has vested. For example - if the share
price of a company is £1, and the strike price is 10p – then there
will be 90p worth of profit for every stock option that person
possesses. A strike price is therefore a price at which you can buy
a share – and if that price is below the true value of a share, then
it is definitely worth using.
How do I know whether I have an attractive strike price or
not when the company is private?
Try and find out whether there was a recent funding
round and what the price per share was at that time -
this is a great indication if you can get it. Failing that - are
there some public businesses that give some sensible
comparisons?
Often VC backed companies will give quite low strike
prices, in order to incentivise their staff - certainly at
below “true share price value” - but make sure you
have done your homework to understand the realistic
potential value of your options.
If you have employee stock options in an investor-backed
company, you will need them to realise through:
• Vesting over time; or
• A “change of control” in the company
A “change of control” typically occurs in one of two scenarios:
The company floats on the stock market
In this instance, your vested stock options (after a lock-up period
post IPO that prevents employees cashing out too early and
sending a bad signal to the market) can now be used. A vested
stock option gives you the right to buy a share at a particular
strike price. If that strike price is lower than the price of a share
in your company on the stock-market, you will make a profit on
each stock option of the share price minus the strike price. If the
IPO happens before all your options have vested, your unvested
options will keep on vesting over time, and you can use them
once they have vested. Once public, a company may also seek to
create new equity incentive structures to motivate key staff –
but these will likely be very different in nature.
Trade sale or merger with another company
In this instance any vested stock options will have to be bought
by the acquirer on acquisition. Just as when a company goes
public, when a company is sold to another business, there will be
a price per share that the acquirer is paying. If the strike price of
your stock options is below that share price – then the difference
between the two is your profit per option. The permutations are
much more complex in this scenario when it comes to unvested
options compared to when a company goes public.
It could be negotiated as a condition of sale by the management
team of the selling company that all unvested options be paid out
by the acquirer. This would probably increase the cost of buying
the company to the acquirer – but would obviously be attractive
to the management of the acquired company. The acquiring
company might want to create a new equity incentive scheme
within the new business to keep key staff – or of course it may
also have its own staff that it intends to use for key roles going
forward.
Accelerated vesting is sometimes offered to the most senior
executives and is only common for CEO roles. Accelerated
vesting means that a proportion of your unvested options (e.g.
25%, 50%, 100% accelerated vesting) instantly vest when certain
“triggers” are fulfilled.
A “single trigger” is an accelerated vesting clause where the
“trigger” is usually a change in control of the company. This is
often unpopular with the acquirer – as they will have to pay you
out on acquisition, and may also have to re-incentivise you with a
new equity scheme if they wish to try to keep you.
Companies may therefore offer accelerated vesting clauses
to the most senior employees with a “double trigger” – where
both triggers must be fulfilled for the clause to apply. The first
clause would be a change of control, and the second that the
employee is no longer wanted in the new business. This can be a
nice compromise as it protects the employee in the event of them
being acquired and not needed anymore, without being too much
of a disincentive to the acquirer.
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