Options: how and how much to issue to an employee?

The author of the telegram channel "Venture by Concepts" Almas Abulkhairov talks about options in simple terms.

Reading the post requires knowledge of the basic materiel for options (https://uklad.vc/tag/options/).

In general, I wrote about how options work in this article (https://uklad.vc/my-employee-option-at-exit/). However, the question of what size of the option pool (ESOP) to make, what percentage to give to the employee and on what economic conditions remains undisclosed.

There are different ways to issue an option to employees in a startup:

  • we can give from the ceiling 0.5% 1% 3% for beautiful eyes - it doesn’t matter
  • By logic - for those who like to logically explain life with formulas ad strive to explain their decisions to people                                                                                                                    To make it more fun to read, I depicted the first method (for "beautiful eyes") as Klingon, and the second (logical) as Vulcan:

Klingon approach                                                                                                                              In our latitudes, the Klingon approach is most common:
— "Alexander, we give you an option for 0.4% in the company"
As a rule, the calculation takes place in the style of "we have 4% of unallocated options, calculated on 10 people, so we divide by 10 and we get 0.4%". The approach is quite working, though it can cause a feeling of equality with an unequal contribution to the team of people who received the option. Does this mean there needs to be some differentiation?

Vulcan approach                                                                                                                               An approach for comrades who love logic in everything: when you want to understand everything with a formula and convince yourself that you made (or you were made) a fair offer. This approach is best suited for early-stage companies, when there is not much money and it is difficult to pay the market salary to employees, to put it mildly, although technically the approach can be applied to any company (as long as there is a common goal - multiple growth).

The context is also important: in an international company, it is still very important in which city the employee is located (if there are several representative offices). Let's say a Mobile Teamlead employee living and working in Moscow:

1. You need to find out how much such a person can really earn by working in a large company where they pay a lot for his skills and experience (for example, in a well-known Russian corporation in a tower, such comrades receive from 300 to 450 thousand rubles in their hands, depending on the project, where they sit. Let's take a conservative level of 400 thousand rubles.)

2. Then you need to understand how much money a person needs to live comfortably in Moscow. Here it is very important to determine what is comfortable housing, because for a million rubles a month you can also live comfortably? We are talking about the minimum level of income at which a person will not think about freelancing, will not buy doshirak and pasta for 16 rubles. in Auchan, will be able to provide for himself / family by going to the restik once a month, in short, he will not think about how to survive. This is a very individual topic, on which you (readers) can discuss with me in a personal mail, or in our channel chat (https://t.me/ukladvc). Let's define this variable as 250 thousand rubles. per month.

3. Compare your compensation with market conditions, but in the form of a salary + option (rather than equalizing the salary with the market. For example, if you pay an employee at the minimum wage, then the difference (400-250) for 4 years will be 7.2 million rubles.

4. Keeping in mind that an option is the right of an employee to earn on an upside (https://uklad.vc/terminology/), it is necessary to give the opportunity to earn at least a minimum profitability during the vesting period (usually 4 years), subject to the growth of the company. The conservative average growth rate is usually taken to be 10-20% per year. Take 10% ⇒ 1.1^4=1.46, round up to 1.5

5. Introduce vesting for 4 years with an annual cliff, at the current valuation of the company (but taking into account when the person joined the company), if the valuation (for example, post-money valuation after the investor entered). If there has never been an investor, then you can put, for example, annual revenue as an assessment of the company.

6. Offer different options to the employee: choose a lower salary, but more options, or vice versa. Check out the Excel calculator below.

Continuation of the article on the site https://uklad.vc/how-much-options/


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