An important part of building a successful company is sharing that success with the very people who make it possible. Stock options are a great way to share the success, and it also provides employees a true form of ownership behind all their hard work. Recently it became time to offer stock options at QGenda, so I began by talking to several entrepreneur mentors, and it was very apparent that there are many ways to setup stock options.
Here are some of the key points to consider when setting up stock options:
- Options should vest over 4 years.
- A typical vesting schedule of the 4 years is broken into a 1 year cliff then monthly vesting thereafter. For Example: if you are granted 48 units, then 12 units vest after the 1st year and then 1 unit per month for the remaining 36 months.
- When calculating the Strike Price you can avoid costly annual valuations by using a reasonable formula to value your business such as 3x trailing twelve month (TTM) revenue.
- Plan on 10% to 20% of the equity of the business to be part of the option pool.
- Create a buy/sell agreement with the same formula of 3x TTM revenue such that any employee that leaves the company has to sell their stock back to the company.
Offering stock options is a great way to provide loyal employees their fair share of ownership in what they are helping to build.
What other key points should someone consider when offering an employee stock option plan?