Stock options are a form of equity compensation in which an employee is granted the right to purchase a certain number of shares in the company at a predetermined price (the "strike price"). These options usually vest over time, meaning that the employee can only exercise their right to purchase the shares after a certain period of time has passed. This is often done to incentivize employees to stay with the company and contribute to its growth. For private companies, the strike price is typically based on the company’s 409A valuation, which determines the fair market value of a share of common stock. The number of shares that can be granted to employees is typically determined by an options pool, which is established during the entity formation phase of the company. The options pool is a set percentage of the total shares outstanding and is reserved for future equity grants to employees.
During the entity formation phase, each company will establish an adequate employee options pool.
Equity compensation aligns incentives between the company and the employee base. It can serve as a great tool to attract and retain talent.
OCV recommends full-time employees to receive equity incentive in the business they’re helping to build. Equity is not available for workers hired as contractors.
Founders: see Company Equity Grant Guidelines here
Similar to cash compensation, equity grants should reflect a candidate’s:
Cash and equity compensation should be considered holistically as an overall package.
Equity grants should also consider the remaining options pool available for candidates and the overall capitalization table of the company.
Determination of equity considerations for employees is not an exact science.
Some platforms exist that charge users to access tracked comprehensive data on equity compensation: