What is a Stock Option Negotiation?
A stock option gives an employee the right to purchase a specific number of shares of company stock at a fixed price.
It’s common to see employees being offered stock options by startups and private companies, as a way to include them in the company’s growth and success. Companies might also offer employees stock options to motivate them.
Guiding the use of stock options is a stock option agreement. This legal document specifies the equity terms and timelines.
Read the rest of this article to explore stock options and how to negotiate them.
What are Stock Option Types?
There are various types of stock options to know about. Some of the most common include:
- Incentive Stock Option (ISO). These stock options are offered in compensation packages for employees.
- Non-Qualified Stock Option (NSO or NQSO). These are offered to various employees, such as contractors and directors. They can be exercised at any time as they don’t have a waiting period.
- Restricted Stock Unit (RSU). Employees receive shares of stock in the future, once conditions are met, such as a performance goal.
- Employee Stock Purchase Plan (ESPP). These vary a little from other stock options. They enable employees to buy stock at a discount.
What are Key Features of Stock Options?
Stock options have the following aspects and terms.
- Expiration date. All options have a set period, outlined in their contract. A longer expiration date can result in a more profitable option.
- Strike price. This is the fixed price at which the stock can be purchased or sold.
- Right. The holder of the stock option has a right to exercise the stock option, but they are not obligated to do so.
- Vesting. When the stock option’s timeframe is reached, you can purchase the stock at the pre-determined price.
- Call options. The holder has the right to buy the asset at a specified price, within a specific timeframe.
- Put options. The holder has the right to sell the asset, also at the specified price within a certain timeframe.
How to Review and Negotiate a Stock Option Agreement?
Since a stock option agreement is a contract that gives you the right to buy stocks, you want to review it and ensure you understand all its terms. These contracts can be complex. Here are some tips for reviewing and negotiating them.
Seek Clarification
It’s in your best interest to request details about the vesting schedule and other information if these aren’t clear in the stock option agreement.
Check the Grant Letter
You should read the grant letter if you have one. This is a document given to employees when they’re awarded the stock options. It also has important information pertaining to share numbers, strike price, vesting schedules, and more.
Consider Your Risks
There could be stock option risks you don’t notice right away, such as if they expire after you leave the company. This can prevent you from being able to sell them.
Research the Real Value
To ensure you know what your equity is worth, you should take time to conduct due diligence. Research the company’s fundraising history and consider possible situations, such as acquisitions, that could increase the company’s value.
Negotiate at the Right Time
It’s preferable to negotiate your stock options when they’re offered to you, as this gives you more room to discuss them than if you’ve already agreed to all the terms.
Get a Legal Review of Documents
To help you understand the stock options before you negotiate them, it can be beneficial to enlist the help of a qualified lawyer. They’ll review all the relevant documents so that they can unpack any technical or legal language, and provide clarity on what you stand to gain.
Here’s how to request a legal review on ContractsCounsel, one of the largest online legal marketplaces where clients can connect with vetted lawyers. Follow these steps:
1. Go to the ContractsCounsel marketplace.
2. Post your request for an agreement review. It’s free.
3. Receive lawyer bids. Lawyers on the platform will send you multiple bids you can review.
4. Review the lawyers’ profiles. You can research the lawyers according to data provided by the platform, such as their expertise, years of experience, client reviews, and previous projects they’ve completed.
5. Choose a lawyer who matches your requirements and hire them for the project.
Understand the Shares
Before negotiating, you want to have clarity about the total shares, their strike price, and their current valuation. If you don’t, you could enter into negotiations without really knowing what you stand to gain or lose.
Consider Asking for More Options
If you want to negotiate for more stock options, remind the other party of the value you bring to the company and your experience. In some cases, companies might offer option grants in exchange for a lower salary.
There are also refresh grants available for employees who have been working at the company for a long time. Should the company have increased in value since you were hired, you could benefit from late-stage growth.
Where to Find a Lawyer for a Stock Option Negotiation
If you need to hire a lawyer for stock option negotiation, you can find a vetted, experienced lawyer on ContractsCounsel. They will help you negotiate your stock options, such as by:
- Explaining what you can realistically receive based on the stock option agreement, to help you formulate the best negotiation strategy.
- Evaluating how competitive the stock option offer is based on their experience.
- Pushing for more favorable terms, such as quicker vesting schedules.
- Identifying risks you might miss.
- Protecting you in the event that you leave your job.
All lawyers on the ContractsCounsel platform are vetted and have experience with helping clients to negotiate their stock options for favorable terms. They’ll give you peace of mind by reviewing and negotiating contract terms before you accept them.
