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Stock Options explained: basics for startup employees and founders - YouTube
Channel: Slidebean
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You started a business and you want to compensate
your early employees.
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Or you've joined a startup and were offered
stock options as part of your compensation.
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How do those work?
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Let's do it.
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Most startups in the US
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compensate their employees with a salary, of course,
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and with stock options.
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The idea here is giving team members an upside
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if the collaborate to increase the company valuation.
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On public companies, that is,
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companies whose stock has been listed
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on a public stock exchange,
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this works somewhat differently,
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so I won't get into that.
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I've never worked for one of those companies, so
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I don't really know.
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This video is mostly about private companies:
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startups where the stock is owned by the founders
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and their select investors.
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It all starts with a stock option pool.
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This is a pool of shares that the company
issues,
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and that it 'reserves' for employees.
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On paper, this is a legal document signed
and approved by the Board of Directors,
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and it represents a new issue of company shares.
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We made a video about how stock works,
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and how shares can be issued to investors,
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so go check it out if any of this sounded confusing.
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The example we'll use today is our own company,
Slidebean.
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In 2016, in combination with our investor
round
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(which is usually when Stock Option Pools are created),
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we decided to create a stock option pool
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of around 5% of the company.
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In this case, the company issued
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530,000 new shares of stock,
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additional to the 10,000,000
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shares we had when the company was founded.
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This means the company now had a total of
10,530,000 shares issued.
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Those 530,000 represent 5.03% of the total
shares the company has issued.
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Even though our team already had around 10 people,
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we wanted to compensate the early employees,
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those who had joined us from the get-go in the earliest stage.
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We also needed some stock options for new,
key employees we were about to recruit.
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Now, at this time, our latest company valuation
was about $2.5MM.
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Which means each share has a value of roughly
$0.2374 dollars.
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So, say we want to give 100,000 shares (around
1% of the company) to Dwight.
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If we just gave him these shares,
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Dwight would have received assets valued at around $25,000,
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which would be taxable.
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He would have to pay taxes for these assets,
that he can't necessarily cash out.
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So, instead of giving them these shares, the
company gives them stock options.
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That is, the option to purchase those shares
at a defined value.
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That value is usually connected directly to
the valuation of the company at the time,
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so in this case, the price per share, or STRIKE
PRICE is $0.2374.
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Now what's really happening is the company
is giving Dwight the right to buy 100,000
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company shares at a defined price of $23,740.
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Now here's where the fun happens.
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Say a few years the company gets acquired
and the startup is no longer valued at $2,500,000
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but at $25,000,000.
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At the time of the acquisition, Dwight exercises
his stock options.
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He has this unique right to pay $0.2374 per
share.
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The buyer, however, has agreed to pay $2.347
per share.
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The difference, roughly $2.11 per share, is
Dwight's margin.
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So just to clarify, Dwight will never have
to pay those $23,740 out of his pocket, he'll
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simply collect the earnings as part of the
acquisition paperwork.
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Now, I've oversimplified this to make it easier
to understand.
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In all likelihood, the company will have issued
new shares during that time.
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That's why it's important to understand that
the stock option pool is represented in shares,
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not in percentages.
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The 100,000 shares Dwight received represented
around 1% of the company back then,
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but later on, they might represent much less porcentage.
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It's the difference between the strike price
and the price per share that gives Dwight
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his advantage.
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This is important to understand, because if
the company doesn't increase in value,
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then those stock options are not really worth much.
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The employee can still buy them
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whenever, he or she wants.
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but, that's usually only done,
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close to an acquisition event
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Now, it's important to note that most stock
options are subject to vesting.
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The norm is s 12-month cliff and a four year
vesting period.
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Check out this video to understand how that
works.
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The point of vesting is, that Dwight will only have access to these stock options
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if he remains as Assistant Regional Manager for a certain amount of time.
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Another important point here is most stock
options expire after 10 years,
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or 1 to 3 months after the employee leaves the company.
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In that case, if the company has actually
increased in value, the employee might choose
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to exercise his or her stock options then.
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They can either keep them for themselves or
sell them, depending on the company policy.
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A fun fact here is how former employees of
Uber are struggling to solve this.
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When they leave the company, they have 30
days to exercise their options or they will be lost.
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Their options might be worth tens of thousands
of dollars even at the strike price, but it's
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almost a guarantee that when Uber finally
goes public, the difference in the price per
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share will give them amazing gains.
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They just can't access that capital yet.
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So, if you're an employee receiving stock
options, congrats, get back to work and help
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make your company increase in value!
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Slidebean might be able to help there- the
first 50 people to sign up with the link below
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will get a free year in our platform.
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If you're a founder, we have a few free templates
of stock option documents at FounderHub.io,
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you can check them out.
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If you have questions, let us know in the
comments.
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Hit that subscribe to stay tuned for future
videos, and I will see you next week!
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