Stock Options and Expanding Exercise Window

Overview

The standard amount of time that departing employees have to exercise their stock options is 90 days. However, some well-known companies have 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 could become the next industry standard.

​The market for employees in the tech field is extremely competitive. Companies should aim to retain their talented and vital team members by incentivizing them as much as possible, and their hard work will ultimately be rewarded if their employees stick around long enough for a liquidity event. However, more employees are changing jobs as companies are staying private longer. As they leave from one company to the next, their previous options typically need to be exercised within 90 days of their termination date, or they lose the right to exercise their vested options. It is a big investment decision whether or not to exercise these options, so the more time the employee has to decide the better. Still, choosing to extend this exercise period is a serious and tricky decision for companies themselves. There are quite a few things to look out for when making a decision.

Practice Pointers
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• 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 also needs to take these options into account when being careful as to not dilute and 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 legal claims for discrimination.
• As you are setting up your business, it is the best time to create and implement your stock option plan. This 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 actually running a successful operation. Every startup is different, and every approach to how to incentivize their team must also be unique.