commitment. Sometimes, the founding team identifies an executive-level hire for a permanent, full-time position. In those
cases, a much larger grant could be considered; perhaps 2 to 5 percent for a seasoned VP of Sales or CTO (if one is needed
in the early days), to as much as 10 percent for a seasoned industry-experienced CEO.
For grants to employees, startups often move towards a relatively rigorous process in which employees in specific job titles
receive a fixed (not a negotiated) amount of stock. Such a hiring matrix helps the management team use the allocated stock
pool more effectively and creates consistency among employees (always a virtue). Further, after the company is funded,
investors will expect the company to have such a matrix, and the board will expect management to keep all grants within the
amounts specified in the matrix (and, if amounts fall outside the matrix, the board will expect management to justify the
exception). Such a matrix is usually based on industry surveys conducted by companies such as Radford, Advanced HR, J.
Thelander Consulting and the Ravix Group. It is also not uncommon for angel or venture capital investors to provide
guidance and help create company guidelines, which may be strongly influenced by local market practices.
Vesting
It’s important to make the grant sizes proportional to expected impact, but it is equally important to set the vesting properly.
All stock option grants should have some vesting period because, with rare exception, the contributions the recipient will
make will be in the future. If the person isn’t succeeding, or if disagreements arise, the management team will want to be able
to terminate the relationship and recoup the unvested shares subject to the grant.
With early advisors and key consultants, it is common prior to financing for grants to vest over a relatively short period, such
as a year or two, since many of these initial contributors are expected to play a meaningful role in the launch stages getting
the company off the ground, not serving it over an extended period. For more information about founder vesting, please see
our article . Vesting is usually time based, typically monthly, but can also be based upon specific activities. These activitieshere
could include attending important meetings such as advisory board meetings, performing specific activities or delivering certain
work product. Note that there can be accounting consequences associated with such performance-based vesting; however,
those consequences are likely not meaningful, as long as the relevant activities are performed prior to a first financing.
Even with early employees, startups should consider adopting the most common vesting formula: a one-year cliff before an
employee vests any shares. Typically, 25 percent vests on the one-year anniversary of hiring or of the option’s date of grant
and monthly thereafter for the next three or four years. Of course, providing for some special vesting for an employee joining
early might be justifiable, but in general the earlier that standard vesting is adopted, the better. The reason for a one-year cliff
is simply that a decision has been made to not award shares to employees who leave or are terminated before they have
served for a year.
Pricing
Setting the purchase price (the "exercise price" or "strike price") of a stock option also is a very important consideration.
Incentive stock options (ISOs) must not have a purchase price that is less than fair market value (FMV) of the common stock
on the applicable date of grant. With respect to non-statutory stock options (NSOs), Section 409A provides a specific set of
factors that should be considered when determining FMV and setting the purchase price of an NSO, including a presumption
of reasonableness if a third-party independent valuation report is obtained and approved by the company. Significant individual
tax and adverse accounting effects may apply if NSOs are granted with a purchase price that is less than FMV on the date of