Hi Hendo Experienced this a number of times in the last few years with VC funded companies. First word of warning, its easy to get into these things, hard to get out once you have done it, so select the team members you grant options to with care.
Many start-ups don't bother with the paperwork and then it gets messy. As options can be viewed as a form of income ie your staff are being granted something of value as a result of their employment, its important to make sure for your sake and the employees that you have followed the ATO requirements. 1. To ensure you comply with ATO requirements (assuming its an Australian company, which is another discussion altogether) get a proper ESOP done by someone who knows what they are doing (not a suburban accountant). I have seen it cost about $10-15k inc valuation, I don't have a recommendation as the guy I have seen do this was very average. But it should cover all the legalities and requirements for ATO and ASIC. If its not compliant you can cause all sorts of tax issues for your company and your team 2. Valuation by a registered valuer (this sets the value of the common shares and option) this is usually co-ordinated by the person doing the ESOP, this is important for tax purposes, it sets the value of what you are offering to the employee. Just because the business is burning cash doesn't mean its shares are worth nothing. Imagine you had a cure for cancer and needed to get it to market, its going to burn cash for a long time but could be currently very valuable. 3. ESOP guy writes to staff telling them of the offer and setting out the official details. 4. There can be tax implications in that financial year for the employee (ie if you grant someone options that are extremely in the money), clearly you cant give financial advice except to advise them that they should seek advice from an Accountant experienced in ESOP to make sure that their options are reported correctly. My experience is ESOP of 10-20% is right, but that can also include a new CEO, and yes you get get a number of shares which will be a % of the total issued *as at the lastest capital raising.* Vesting: Yes they can vest over a period, ie 2-4 years, but I have also had a % of them vest on achievement of board mandated goals. Depends on what you want from the person, if they are going to be instrumental in building the company and you need them to achieve certain goals quickly, set them a goal that reflects them doing this, not just serving time and award the options as soon as they have made the goal. Here is the catch (if you are hired help), depending on how much cash your company has, or if it is planning a capital raising, you could be diluted to a very small % quickly, especially if you have a highly dilutive round or a number of rounds. Some VCs/investors will considering "top up" the number of shares for the ESOP to make sure the team still has real incentive to achieve (once you have professional investors, ESOP changes are usually going to be outside the founders control). Also interesting to note for both team and founders is the effect of liquidity preferences and warrants, typically in an liquidity event ie sale, change of control, merger, a VC funded company will have a preference shares which need to be paid out from the sale proceeds before they convert to common shares and then share in the remainder of the sale proceeds. so if a company gets sold for $10 mill but has taken $2m pref shares with a 2x liquidity preference, the pref shares will be paid $4m, convert to ordinary shares and share in the remainder of the sale proceeds. Likewise some funding agreements have warrants (like options except attached to preference shares 1:n ) which are exercisable when a liquidity event occurs. Its a pretty complex area especially when you have investors involved, so get proper advice, also if you haven't done it properly, it will make it much harder if you are trying to get external investors involved, one of the first questions on the Due Diligence list deals with outstanding options, shares and/or commitments, agreements with staff. Mike Nicholls On Tue, Nov 11, 2008 at 10:50 AM, Maxim Shklyar <[EMAIL PROTECTED]> wrote: > As little as I know it works like this: > > You not get 0.0..% , you get an option to buy X shares at a > given price (normally the share price when you started working). When you > want to execute the options if the share price is higher, than you get > something, otherwise not.. > > The X shares you get are vested over some time (like 2 > years) – if you quit after 1 year you only get X/2.. > > > > http://en.wikipedia.org/wiki/Employee_stock_option > > http://en.wikipedia.org/wiki/Vested > > > > > > --- > > Maxim Shklyar > > kisla interactive > > > > > > *From:* silicon-beach-australia@googlegroups.com [mailto: > [EMAIL PROTECTED] *On Behalf Of *Hendro Wijaya > *Sent:* Tuesday, 11 November 2008 9:53 > *To:* silicon-beach-australia@googlegroups.com > *Subject:* [SiliconBeach] Employees' stock agreement > > > > Hi All, > > My name is Hendro and this is my first post here. :) > I'm curious on how the agreement works for the company that want to give > their employees some stocks options (like Google / Microsoft for example). > Are they talking in terms of % like "I give you 0.02%?". That doesn't sounds > so appealing. > > I have a plan to hire some early developers. They will be given some salary > like usual but, to ensure they have common interest to drive the company > forward, I would love to do some profit sharing scheme in a scalable way. > > Any thoughts? > Thanks! > > Cheers, > Hendro > > > > > --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Silicon Beach Australia" group. To post to this group, send email to silicon-beach-australia@googlegroups.com To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/silicon-beach-australia?hl=en -~----------~----~----~----~------~----~------~--~---
