Four major issues that startup companies should pay attention to when implementing equity incentives
The following is what eBay founder Shao Yibo shared
From the time I returned to China to start a business
A lot of things have changed in the ten years since I returned from overseas. It’s outdated and the country turtles dominate (see my previous blog Turtles or Country Turtles?) When I first returned to China, the word option did not exist. Now every entrepreneur and employee, and even people of my parents’ generation, have heard of it. Pass. I remember that in 2000, I wanted to hire two engineers to become the third and fourth employees of my company. I spent a lot of effort and promised that everyone would have %. They asked me what this was and I explained it and spent a long time looking through dictionaries on the Internet to translate it into stock options. In the end, they did not join and missed the opportunity to become multi-millionaires in the future.
Options give an employee the right to buy the company's common stock at a certain exercise price, which is usually a very low price within a period of time. This right is very valuable. I remember that eBay had a total of 10,000 shares in 2018. Assuming an employee received %, that is, the exercise price of 10,000 shares was cents. When the company was sold in the year, each share had been split into shares. After the split, the value of these options was (./) = US dollars (the exercise price can be ignored).
When the company was very young and could not afford high wages and required employees to give up their original stable jobs, options were a very useful tool to motivate employees. In addition to attracting employees to join, options can also play a role in retaining employees. If an employee takes a salary or bonus and then leaves the company, it will definitely harm the company, but it will not harm the employee himself.
If an employee takes options, the situation will be different. First of all, if the option lasts for several years (usually by 2020), if he leaves early, he will get less. If he leaves in 2020, he will only get two-fifths. Secondly, the general option agreement stipulates that employees who resign need to exercise the options within the day after resignation. Therefore, even if it is a one-cent or ten-cent dollar option, if it is tens of thousands of shares, employees may have to spend tens of thousands of yuan to get these. common stock. Before the company goes public, these common shares are not tradable and are just a piece of white paper, so it is a difficult decision for many employees to buy or not. Third, if an important employee leaves, it will cause losses to the company. As a shareholder, he will also have to bear these losses. This will also be one of the reasons for an employee to stay in the company, or at least he will not leave the company to work for a competitor. Do something harmful to the company.
Now that we have talked about these basic concepts, let’s talk about some problems that entrepreneurs often encounter at the operational level.
The first and most common question is how much to pay? Of course, in general, how much to pay mainly depends on the employee's position in the company, salary and the company's development stage. If I just say these empty words, it may not be of great help, so based on my own experience, I will give you some approximate figures for your reference. When the company is started (defined before entering), a vice president may need % to % of option rounds of financing. After that, the vice president becomes % to % of financing. After the round of financing, the vice president becomes .% to % or close to it. arrive.%. In addition to the founder, the company's core executives (, etc.) are generally one-third to one-half times the director level, and one-third to one-half the number of vice presidents, and so on. This is just an approximate estimate and there are many factors in practice. For example, a vice president may want more options and be willing to lower his salary very low (I like this kind of person because I can see his enthusiasm and confidence in the company). In the later stage of the company, options will no longer be discussed in terms of percentages but in terms of a few shares.
Some people may ask me how to define vice president and director because different people may have very different definitions. I define a vice president as a person who can manage one or several company departments on his own and manage at least dozens of people. You can imagine that when the company matures or even goes public, he will continue to be a vice president as the company grows. A director is a person who can take charge of a department in the early stages of the company, but it is not yet clear that he will be able to continue to stand alone after the company matures in the future. He may become a vice president, or he may become a person who manages one or several branches of a department under the vice president. principal. The director may also be the most core and most powerful technical expert. If your definition of vice president and director is different, you can adjust the numbers I just mentioned.
The second big question is year, year or year? Many entrepreneurs think shorter is better. I think longer is better. If a good company succeeds for three years, it is very lucky, and five years is relatively normal. You don’t want your employees to come to you after two and a half years and ask, my options will be all gone in half a year. Please give me some more. There is also a clause that when the company goes public or is sold, whether the options that employees have not received should all be immediate. There is no consensus here. I think it would be fair to split the remaining options in half so that the employees would be happier. At the same time, it is not entirely possible to prevent many employees from leaving immediately after the company goes public or is sold.
The third big question is how many people the options will be given to. eBay followed the path of Silicon Valley at that time. Almost everyone in the company had stock options and they were issued very early. There were employees who were issued right from the beginning of the company after their probation period. The advantage of this approach is that everyone can work together to make the company successful and everyone is happy. The disadvantage is that because everyone has it, everyone gets it for free, and many people don’t value it enough and feel that the option is not worth a lot of money. There are also some companies that go to the other extreme and issue the funds very late, when the company is about to go public, and the amount is very small. Many employees do not have them, or only old employees who have been working for more than two or three years have them. Several companies that I am currently involved in, including Anjuke, Novamax, etc., adopt a compromise approach. Most employees have stock options, but they are not automatic. They are given if the employee's position or work performance meets certain standards. There are quite a lot of words.
The fourth big question is how much the exercise price should be. If the round price is in US dollars, should the exercise price be US dollars, US dollars or cents? Many reasons for insisting on setting it in US dollars are that if there is no profit and the stock price is less than US dollars when the final exit is made, then employees should not make money either. I don't quite agree with this point of view. First of all, the purpose of options is to attract and motivate employees. The lower the exercise price, the greater the value of the option per share and the more attractive it will be. Secondly, the exercise price of the option does not affect the return when the company is eventually listed or sold. For example, if the company sells for 100 million U.S. dollars, the price per share is 100 million U.S. dollars minus the liquidation preference and then divided by the number of all stocks (including preferred stocks, common stocks and all options in English). Theoretically the correct algorithm should be (total amount + average exercise price of option volume)/number of all stocks, but I have never seen an investment banker or M&A buyer calculate this. Therefore, setting the exercise price high is harmful to others and not beneficial to oneself.
So how low should the exercise price of the option be set? It depends on the accountant. General accountants will allow a start-up company to use one-tenth of the stock price of the previous round of preferred stock as the exercise price of the option. When the company is close to listing, the exercise price will gradually approach the price of the preferred stock. The exercise price after listing must be the current price of the listed stock.
I really like options. It is the biggest magic weapon for small companies to attract and retain talents, and people are the most important thing for a company's success.
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