Module 4 · Chapter 12

Employee Equity and the Option Plan

Young companies pay their staff partly in options, rights to buy shares later. This chapter follows an option plan from the pool to the exit, and an investor's fee that outlived the Investment Agreement.

≈ 13 min read 8-question test

In this chapter

  • What an option gives an employee, and what it does not
  • How exit-only options are priced, vested and paid for
  • Why the investor's fee survived the end of the Investment Agreement

12.1Employee options in one paragraph

A young company pays its staff partly in options, because it has little cash to spare. An option is a right to buy a stated number of shares at a fixed price, the exercise price. If the company is later sold for more, the employee keeps the difference. The option pool (the shares set aside for options) limits how many the board can grant.

At Solaris the pool grew to 4,800 shares, and all of them were granted to 105 employees. None of them held a share until the Exchange, when Meridian bought out every other shareholder.

Key point

An option is a contract with the company, not a share. Its holder becomes a shareholder only when entered in the register of members.

Also in this chapter

  1. What an option gives, and what it does not
  2. How the exercise price is set
  3. Vesting, leavers and tax
  4. Why options can be exercised only on an exit
  5. Who pays the exercise price on the day
  6. How the employee trust recycles shares
  7. Every option exercised at the Exchange
  8. The investor's fee lives in a separate contract
  9. Why the fee outlived the Investment Agreement
  10. Cash bonuses replace the options
  11. Your job

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