Stock Options and Expanding Exercise Window

Overview

Typically, most stock option plans allow departing employees to exercise their options within 90 days of employment termination. If the options are not exercised before that date all vested but unexercised options lapse. This 90-day window becomes critical, particularly for early stage startups, where the departing employee may not wish to exercise their options just yet as there is no ready market available to trade such shares and the value of shares is mostly "on-paper" but not exercising them would also mean that the employee is giving up the right to purchase a potentially valuable stock at a cheap rate.

To remain competitive and to attract top talent, startups should consider extending this post-termination exercise window beyond 90 days. Some well-known companies have already chosen to diverge from this usual path. Companies like Pinterest, Square, and Coinbase offer employees who have worked for a minimum period of time an extended window in which they can choose to exercise options. Triplebyte, a tech recruiting website, recommends that companies implement a 10-year exercise window instead, which may become the next industry standard.

​From the company's perspective, choosing to extend this exercise period is a serious and tricky decision. There are quite a few things to consider when making such a decision as it involves both legal and financial/tax implications.

PRACTICE POINTERS

• The way you incentivize your employees should be tailored specifically with your startup’s unique qualities in mind. Companies should tie in their extended exercise windows based on their products, services, timelines, employees, and end goals. Simply following a standard "industry norm" may not always be beneficial.
• The window for options does not have to be just 90 days or 10 years. It can be anywhere in between, even with a minimum period of service. There is room for flexibility in setting the terms and it may even make sense to have different levels of exercise windows based on a pre-set criteria.
• While employees will enjoy extended exercise windows, VCs may not necessarily prefer them. The longer the window, the less chance for the employee to utilize them until a liquidity event or until they ultimately forfeit them. As employees sit and wait, the options are still taken from what the company can work with to incentivize potential workers. The company will needs to account for these options while being careful so as to not dilute or diminish the value of their shares.
• Be very careful when incentivizing certain workers more than others. While certain workers are more critical than others, this could break the overall teamwork and drive between the employees. To prevent these sweeter deals from leaking in an undesirable way, it is better to be more open to the staff and explain the differences and incentives between workers. In any case, unequal incentives may always generate some sort of negative response from the employees, as also may open the company to employment claims for discrimination.
• As you are setting up your business, it is the best time to create and implement your stock option plan. That way, the same policy and information is given to all employees and future ones. Changes or new policies further down the timeline will create more legal, tax, accounting and practical obstacles.

 
With the technology industry growing so rapidly and their market for employees being in such high demand, there will always be need for more and more incentives to retain the most talented workers. However, there must be a balance between keeping the workforce happy and running a successful operation. Every startup is different, and every approach as to how best to incentivize their team must also be unique.