Part 2: Read This Before Signing Your Contract
In this content series, we’ll cover the critical intersections of startup employee options. Each article will discuss a different point in time, offering tips to consider before, during and after working at a startup. If you didn’t get a chance to read our opening article, find it here.
The high-tech sector suffers from a severe talent shortage that is expected to reach $8.5 trillion by 2030. This puts skilled employees in a strong position when negotiating the terms of their employment, as companies compete over talented people by making tempting offers. But to realize what each offer actually means, prospective employees must gain a deeper understanding of the options and equity component. Here are a number of key elements worth focusing on.
So many options
Let’s start with the basics.
Stock options give holders a right to purchase shares at a predetermined price. There are different option types and other considerations to keep in mind when first addressing the company’s offer.
Israeli tax laws offer employees certain incentives under Section 102 of the Israel Income Tax Ordinance. This means that when you exercise your options into shares, and then sell your shares in the future, you will not be taxed for your profit under Regular Employment Income, which is subject to progressive income tax rates and can reach up to 50% tax. Section 102 will enable you to be taxed under Capital Gains Income, deducting your tax a flat payment of 25%. External contractors for example, don’t enjoy these benefits.
Fair Market Value (FMV) or 409A: This element helps us determine the value of private stocks, Since they’re not traded on the stock market, their value may seem vague. FMV represents the price of the company’s Common Stock (different from Preferred Stock, which are the stocks that investors own) if it were public, and the options’ exercising price is based on it. Knowing this value gives you context with regards to the exercise price offered to you by the company, and whether it is exactly equal to the company’s current FMV. It is common for companies to offer a discount on this value, pending on the offered position.
Paying your dues
Due diligence is a critical yet tedious process that companies go through when the time comes to raise funds or discuss an acquisition. You too can and should conduct due diligence before signing a new contract.
There’s enough public information to answer many relevant questions regarding the company. You can also speak to former and current employees to learn more. Last but certainly not least, companies like Robyn Capital provide more information and insights to help you make a wise decision. You can request your prospect company’s valuation and other information at our valuation page
Focus your research around funding rounds and the company’s investors, the founders’ background, prominent clients for B2B companies, website traffic ranking, and more. Seek concrete numbers, but also read about the company’s story and vision.
Plan for success
Examining the company’s option plan is vital. The same way your employment agreement details everything you need to know about your new job, the stock option agreement explains the terms of your investment, letting you know how many shares to expect, the type of options involved, the exercising price and schedule, and more.
Focus on elements like the vesting period, cliff and expiration date. Vesting is the term that represents how long it would take for you to gain ownership over your options. The cliff is a shorter period of time in which some of the options are earned. You want the timeline to be reasonable, enabling you to move on if you feel the need without giving up on your financial assets. Finally, check that the expiration date is reasonable and the Post-Termination Period (PTE) leaves you enough time to buy your options after leaving the company. Make sure that this window of opportunity isn’t too small. Companies typically offer employees a PTE of at least 90 days.
Another part of your plan involves negotiating and investigating the future of your investment possibilities. For example, ask regarding the add option over time and following a promotion. Get as much information as you possibly can and take it all into account when making your final decision.
Before signing a work contract, you probably ask friends and colleagues who are familiar with the company what they think. You Google the latest PR articles and take them with a grain of salt, and check anonymous reviews on dedicated websites. Harness the same state of mind for your due diligence and don’t hesitate to approach our experts for more information. In-depth research is one investment you definitely want to make.
