As your startup gets off the ground, you need to start thinking about the breakdown of company ownership. Defining the equity arrangement for the founding team and future employees is a blend of art and science.

Sure, there are online tools, calculators and a standard equity formula that can help you determine equity compensation, but just like the nature of the startup industry, you have the opportunity to disrupt tradition with your equity arrangement. A blank canvas is at your fingertips, and ultimately, what you put on paper represents your idea of what’s best for the company and the employees. When deciding the stakes in your company ownership, consider these alternative equity arrangements highlighted by First Round Review:

Lengthen the Standard 90-Day Exercise Window

The standard employee equity compensation includes a 90-option exercise window: When employees leave a company, they typically have 90 days to exercise their stock options. This process usually involves paying an exercise price and the tax liability on the shares. If employees don’t take action on their stock options within the 90-day window, the stock returns to the company.

Companies are starting to rethink the 90-day window practice.

The problem is, this rigid standard puts a financial burden on a former employee, especially when he or she is still in the midst of finding a job or starting a new job. However, companies are starting to rethink the 90-day window practice. Amplitude, a mobile analytics startup, allows former workers to exercise their stock options up to 10 years after they leave. This process is possible by converting stock options from Incentive Stock Options (ISOs) into Non-qualified Stock Options (NSO) after 90 days.

Amplitude has offered a template of its innovative ISO agreement, and with the help of a lawyer, you can implement a similar provision in creating an equity arrangement for your founders and employees.

Focus on Transparency

At surface level, communication may not sound like an innovative approach toward equity compensation. However, it’s common for new startup employees to learn about stock options by sorting out a pile of paperwork, compelling them to figure out their equity compensation on their own. Also, companies typically don’t want to share the number of outstanding shares. These typical practices show that transparency is often not a priority, which forces employees to make important financial decisions in the dark.

Clear communication makes the difference in your employee relations and the longevity of your startup.

That’s why Amplitude changed the way it educates and informs employees about equity compensation. The company created an employee stock summary chart about the various scenarios and possible outcomes. When job candidates join the company, they receive a customized chart that explains the equity arrangement. While a chart doesn’t sound like a groundbreaking, alternative method of employee compensation, the document shows proactive transparency. Clear communication makes the difference in your employee relations and the longevity of your startup.

While Amplitude provided a template of its employee stock summary chart, the right lawyer can help you get the details right the first time, and thus, position your company for long-term growth.

With any arrangement for equity compensation, the provisions must accomplish a key goal: the breakdown of company ownership is fair to the founders and employees. These alternative equity arrangements are ideas of ways to better align the values of your startup with the treatment of your team.

About the author

Courtney Cregan

Courtney Cregan

Courtney Cregan has more than five years of experience working at AmLaw 100 law firms. Courtney earned a bachelor's degree in women and politics from Trinity College in Hartford, Conn.

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