All good things must come to an end. If you’re leaving a startup with equity, it’s essential to understand exactly what you’re walking away with. This article will help you understand your position and make smart decisions as you exit the startup.
Leaving With a Stock Grant
Most startup stock comes with a vesting schedule. The concept is simple. Instead of earning equity all at once, the founder or employee earns it over a set schedule.
Vesting acts as both a reward and a motivator for employees. The reward: The longer you add value to the company, the higher stake you’ll have in the company. The motivator: If you’re not adding value to the company, you’ll be terminates and leave with less (or potentially no) ownership in the company.
The most common vesting term for startups is four years with a one-year cliff. So, how does it work?
Let’s say that our startup Gregarious Games Inc. issued Kiera 48,000 shares on a four-year vesting schedule with a one-year cliff. For the whole first year, the employee receives zero shares. But on the one-year anniversary, they receive all of the equity from year one: In this case, 12,000 shares or one-fourth of the total equity award. Then they will vest the remaining 36,000 shares over the remaining three years on a monthly schedule, or 1,000 shares per month. If she leaves or is terminated, this is what will happen:
- If Kiera leaves before 12 months, then she gets zero shares. She walks away with zero shares because she has not hit her cliff.
- If Kiera leaves at 12 months, she keeps 12,000 shares.
- If Kiera leaves at 24 months, she keeps 24,000 shares.
- If Kiera leaves at 36 months, she keeps 36,000 shares.
- If Kiera leaves at or after 48 months, she keeps all 48,000 shares.
Before accepting any equity grants, make sure to review your employment agreement carefully and understand how the buyback clause works. This will help you make an informed decision about whether or not to join the company and ensure that there are no surprises down the line if you decide to leave.
Leaving With Stock Options
A vesting schedule for stock options works the same way as vesting for stock grants, but there are some major practical differences.
- Purchasing. A stock option gives you the right, but not the obligation, to purchase shares in the company at a set price, this is known as exercising your option. To own shares in the company, the option holder needs to exercise their option. This means that they will purchase the shares at the exercise price set forth in their stock option grant. An option holder may only exercise the options they have vested.
- Exercise Window. Furthermore, most stock option grants require that a departing employee exercise their shares within 90 days of departure. If they don’t exercise their option within the 90 days, they lose the ability to do so forever.
For example, let’s say our startup Gregarious Games Inc. issued 48,000 stock options with an exercise price of $0.01/share to Kiera on a four-year vesting schedule with a one-year cliff. If Kiera left after 24 months, then she would have the right to purchase 24,000 shares for $240 (24,000 x $0.01 = $240). In order to take ownership of those shares she would need to exercise her option within 90 days of her termination date.Â
Reviewing Equity Agreements Before Leaving a Startup
When leaving a startup, it is crucial to carefully review your equity agreements and seek legal counsel before making any decisions. These agreements contain important details about your equity grant, such as vesting schedules and other restrictions which can significantly impact your ownership rights.
A lawyer can help you understand the legal implications of these agreements, advise you on potential risks or issues, and ensure that you are fully informed about your rights and obligations as an equity holder. By reviewing your equity agreements with a lawyer, you can make an informed decision based on all available information, which can help you exit the company on favorable terms and minimize any surprises or unexpected outcomes down the line.
If you’re looking for legal counsel, feel free to reach out to us here.
How Acquisitions and IPOs Affect Your Equity Holdings
When a startup you own equity in is acquired or goes public, it can significantly impact your ownership rights and the value of your shares. In such cases, it is important to understand how your equity will be impacted and what options you have.
Acquisition
In the case of an acquisition, the acquiring company may offer to buy your shares at a premium as part of the deal. This can be a good opportunity to cash out your equity and realize gains without waiting for an initial public offering (IPO) or other exit event. However, it is important to carefully review any acquisition offers and consider if selling your shares is the best option. Depending on the specifics of the deal, you may be able to negotiate for better terms or hold onto your shares if you believe in the long-term potential of the combined company.
Additionally, an acquisition can trigger accelerated vesting of any stock options you hold that have not yet vested, depending on the terms of your employment agreement. This can be a valuable opportunity to maximize your ownership rights before leaving the company.
IPO
If the startup you own equity in goes public through an IPO, it can be an exciting time for investors. However, it is important to understand how this event will affect your ownership rights and what options you have.
When a company goes public, its shares are listed on a stock exchange, making them available for purchase by individual investors. As an equity holder, this means you have more liquidity options for selling your shares. However, going public can dilute the value of existing shares as new investors enter the market. Additionally, there may be restrictions on when and how much equity you can sell immediately after an IPO due to lock-up periods or other regulatory requirements.
By staying informed and seeking professional advice when necessary, you can make informed decisions to maximize the value of your equity while minimizing risk.
