Employee Stock Options 101

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Understanding Stock Options


This may be the largest lump sum

of potential wealth you’ll receive!

SUPER IMPORTANT


• Employee ownership is an important part of tech startup culture

• Everyone is a shareholder• Reinforces that everyone is on the same team,

everyone is sharing the success of the company• Aligns everyone’s interest – makes you think

and act like a founder of the company• Stock option is by far the most common form of

employee equity issued in startup companies

EMPLOYEE EQUITY


A stock option is the right, but not the obligation, to buy a fixed number of shares of stock at a specified price for a specific period of time.

WHAT IS STOCK OPTION?


WHY STOCK OPTION?• It is all about “tax”• Unlike stock grant, you don’t have to pay tax

when you receive stock option grant• Canadian advantage: When you exercise your

options, you can deduct 50 per cent of the income derived from exercising stock options (i.e. only half of your gain is subject to tax)

Note: Please consult your accountant for financial advice. I am not an accountant!


HOW DO I KNOW HOW MUCH MY OPTIONS ARE WORTH?

Current Market Price

– Grant Price e

= Value of Option


HOW DOES IT WORK?Example:2012 - $1 grant price2015 - $13 stock price2016 - Exercise: $12 gain

Note: numbers here are for illustration purpose


VESTING• Your options must be vested before you exercise

them• Vesting usually happens over a four year term

and “cliff vest” the first year (i.e. 25% on one year grant date anniversary, monthly vesting for the next 36 months)


EXERCISE• Two common times when you would likely

exercise1. When you are preparing to sell the underlying

common stock, mostly likely in connection with a sale of the company or liquidity event like a secondary sale opportunity or a public offering

2. When you leave the company

• Three ways to exercise1. Cashless exercise

2. Sell to cover

3. Cash purchase and hold


FAQ• What is the difference between preferred stock and

common stock?• I heard something called 409a assessment. What does

that mean?• I have no plan to leave the company. Is there a reason

for me to pay cash and convert my options to stock? • I am planning to work for Wattpad until I retire. Will I be

able to keep my stock options ‘til then?• This is different than what I learned from Shark Tank.

What should I do? (Answer: Shark Tank is just a TV show. Live performance is always better!)


IF YOU WANT TO KNOW MORE …

• AVC.com, search for “employee equity”, “stock options”, etc.

• Feld.com• Brad Feld’s book “Venture Deals: Be Smarter

Than Your Lawyer And Venture Capitalist”• Talk to me


• Aligns everyone’s interest – makes you think and act like a founder of the company

• This may be the largest lump sum of potential wealth you’ll receive!

IF YOU CAN ONLY REMEMBER ….


Thank You!Allen Lau CEO and co-founder wattpad.com/allenlau @allenlau

Funded by: Union Square VenturesKhosla Ventures OMERS VenturesGolden Venture PartnersVersion One VenturesJerry Yang

Business

Employee Stock Options 101