Michelle Coventry has been working in the people and talent space for over 20 years and, not only does she really know her stuff, she's also generous with her time and knowledge to those coming up in startupland. She is also VP of people operations at autonomous car technology startup FiveAI and part-time talent advisor at VC Kindred Capital. We chatted to her about how to set up stock options schemes and the value they can bring to European startups.
So what actually are stock options?
Options give team members ownership in the company. They give people the right, without obligation, to convert their options into shares at a pre-agreed price (known as the strike price).
Most have a four year ‘vesting period’ with a one year ‘cliff’. So although options are issued to you at the start of a contract, their ownership is only transferred to you on your first anniversary. At this point, you can exercise your option to buy 25% of your agreed shares. The rest then continues to vest (transfer of ownership) on a monthly basis.
Index Ventures has put together this great guide to stock options for European companies.
Determine the size of your options ‘pool’
How much equity do you want to set aside for the team? The standard is 10% but some companies can be generous and make it around 15%, especially when setting it up for founding teams.
Advice will come from peers, VCs, mentors... who will all have opinions but ultimately the founder, alongside their board, must determine the scheme. You can set it up, arguably, in a spreadsheet for the first 80 to 100 hires.
An HR system, like Figure, should have the functionality to set it up and model out the scheme.
Who should have a piece of the pie?
Some founders will only give options to the founding team and others will give them to the whole company — although that doesn’t mean everyone will exercise their right to purchase shares.
It’s important to discuss it with your team. Some will be excited by it, others won’t know what it is and for others hard cash is more important because of dependencies or less appetite for risk.
You have to budget and spend equity like you would cash
Like cash, it will change with company growth. At every new round of funding, options will refresh as you set up a new cap table and there will also be new people to bring in. So, budget your options pool as part of your financial planning. For example, when mapping out new jobs, budget in their salaries and stock options.
At FiveAI, we have different bands of salary and stock options for each job.
Equity is part of the total compensation
At the early stages of a company, founders rely on others to bring life to their idea. It’s only fair and right to give equity to those who are taking early risk as their work will have a direct impact on the value of the company. Equity lets them gain in the upside — it can genuinely change your life.
Education for your team is key to ensure the scheme is beneficial to all parties
Articulation of stock options in Europe and ‘equity culture’ aren’t as advanced as in the US, mainly because we don’t have as many success stories and there are complex regulations and tax issues that differ per country. This is a problem because it undervalues a genuine reward. Invest in education within your team.
Talk about equity value at all hands and at salary reviews — it should be a powerful retention tool. Make the knowledge of its mechanics simple and accessible in company wide documentation.
Remote work makes admin more complex
People wanting to work anywhere increases the admin overheads for allowing that freedom. [Stock options] rules and regulations are different in each country. Although you can’t provide exactly the same for everyone, you can create representative and reflective schemes.
Get advice on workarounds — there are phantom stock schemes which work and pay out slightly differently in a liquidation event.