Does this stock options package sound good?

Question

I got the following stock options offer:

"The stock options will be granted as possibly feasible following the start of you employment. The stock options will have a strike price determined by the board of directors at the time of the Grant, will vest linearly over 4 years from the date of your hire (with a 1 year cliff) and will be subject to customary cancellations provision (e.g. tetmination for cause) in accordance with the company stock options plan".

I have a few questions:

1. What exactly means: "strike price determined by the board of directors at the time of the Grant"? Do I need to ask to word it differenly?
2. Do I need to say that after the cliff, they cannot remove the equity.
3. What more can you tell me please? 🥺

Answer 1

What exactly means: "strike price determined by the board of directors at the time of the Grant"? Do I need to ask to word it differenly?

You can ask, it is unlikely that you have any power to customize the wording. What it means is that the board will approve your grant, and the strike price will be determined based on the timing of that approval. Usually, these are approved at the next board meeting after your contract is signed. You can ask how frequently the board meets. The actual strike price is based on the company valuation at the time of the approval.

Do I need to say that after the cliff, they cannot remove the equity.

Once it vests, it belongs to you. Usually, for stock options, there are still string attached even after vesting. For example, if you leave your job, the stock options may expire within 3 months or so. You'll need to read the plan document for the details.

What more can you tell me please? 🥺

Unless it's a public company, stock options may be useless and worthless. You'll need to research what you can do with the company shares if you decide to execute the options when the company is not public. Some companies do not allow share transfers, some only allow buybacks, some allow OTC trading. For smaller startups, options is a gamble which more often than not doesn't pay off.

I'd suggest focusing on the actual compensation you're getting more than the phantom paper that may end up being worthless, unless you're absolutely certain you're working for the next big thing.

Answer 2

1. The price of your stock options generally must be no lower than the deemed "fair market value" or "409a valuation" of shares of common stock, otherwise there are pretty severe tax consequences to you and the company. It's standard for a company's Board of Directors to green-light a stock grant and all of the details. The strike price (aka exercise price) almost certainly will not be higher than the 409a valuation - if it is higher and there isn't a clear and reasonable explanation of why (I don't even have an example of a reasonable explanation because I've never seen it happen), that's a company I'd be very suspicious of working for. In my opinion, it's a non-issue. First, because you'll probably have a standard grant document that the company won't be willing to change for a one-off, and second because even if they did issue a grant at a higher price, that would be an early red flag and potential catalyst to start looking for a new job.
2. Once the grant is awarded, it can't be voided except under specific circumstances. The grant should already have those circumstances listed, for example, "any unexercised options expire 90 days after ending employment", or, "if terminated for cause, exercised shares can be clawed back by the company", or, "all unexercised options expire 10 years after grant". Note that your options must be exercised before the equity becomes yours. All the cliff means is that after 1 year, you have the right (but not the obligation) to pay your strike price per share and buy up to 25% of the shares. If you choose not to exercise your options, you don't own anything.
3. Employee stock options are a whole can of worms. They are a high-risk/high-reward form of compensation, and there's no guarantee that they'll ever be worth anything (assuming a private company since you have the start-up tag). Additionally, you'll need to account for potential tax implications when you exercise. Some grants allow you to "early-exercise" before the options vest, others have extended post-termination exercise windows, etc. It's important to review your grant document carefully and fully understand what you're getting.

Answer 3

This is a very standard option agreement, nothing unusual here.

What exactly means: "strike price determined by the board of directors at the time of the Grant"?

If a company isn't publicly traded, the value of the company if often determined by the board of directors in regular interval. This is then used to set the current stock price which will be your strike price.

Do I need to ask to word it differenly?

You can ask but they won't change it. You can ask for the current price and when the next board of directors evaluation will be. Chances are, your strike price will be close to the current on. However, timing does matter here: While unusual it's not impossible that the Board makes a large evaluation change which can affect your strike price both ways

Do I need to say that after the cliff, they cannot remove the equity.

No. That's not how it works. First of all: you do NOT own equity until you decide to exercise the options and buy actual stock. The cliff means you are not allowed to exercise during the first year. Once options are vested, you can exercise whenever you want. That includes "not at all", most people will refrain from exercising until there is a way to sell the stock: either through a private investor/buyer or by going public.

What more can you tell me please? 🥺

Stock options are COMPLICATED. I strongly recommend you educate yourself about them. A good resource is https://www.amazon.com/Consider-Your-Options-Equity-Compensation/dp/1938797175/. Buy it and read it (or something similar).

While options can be a fantastic opportunity, there are considerable risks and pitfalls. Besides the mechanics of the options themselves, there are very complicated tax implications and at least in the US some people have been bankrupted by not managing this correctly.