Thread by @ido_sum

#ESOP > time to demystify, and talk openly about the opportunities and implications for both founders and employees (to be clear – this isn’t tax advice or legal advice > just trying to make some sense of it for the many questions I recently got…)
Long #Thread, here we go…👇

1/ To start with, ESOP (Stock Options), can come in many shapes & forms. It serves 2 main things: (i) for founders, one of the best ways to attract+retain top talent;(ii) for employees - a potnetial for material upside making #AfricaTech, one of the most attractive options around

2/ Before focusing more on what’s important to know & consider as an employee (much hairier topic in my view) let me share this: #founders need to think through/plan for ESOP right from the start. Maybe not at pre-seed, but I’d argue that latest right after, and preferably before

3/ VCs (us included), often push founders to include 10-12% (even more at times) allocation for ESOP prior to the round. Many see this as a negotiation tactic, and believe that driving it down by a third or a half is a win for the founder.

4/ #BreakingNews – it really isn’t. If you end up not needing it, it can be taken back. If you plan of hiring and retaining a fantastic team, you’ll need this or more with time.

5/ The earlier done – the better. Allows you to start attracting employed from fairly early with it, and makes life easier not needing to battle with later round or much worst – between rounds – where it may prove very difficult.

6/ And now – for the main dish – what can ESOP mean for employees – and how on earth should you start thinking about it.

7/ One of the annoying (to all) things here – is the lack of clarity, transparency and standards that allow employees not just to understand upfront what they are getting, but as important, to be able to COMPARE offers not just on pay but also on ESOP upside.

8/ 5,000 shares in company A and 6,000 un company B can be night and day – actually, the number itself with no other data means just one thing. Nothing.
> *So what should you know, what you must ask, and what can founders do to help?*

9/ First, understand where ESOP is granted and its legal format. Options, in order to be worthy, need to usually be given @ TopCo (where investors invest their $) and this can be local, US/Mauritius/UK/EU etc Each drives different tax implications
This is🔑> We'll get back to it

10/ Understand the key terms:
> What share (%) of the total pull are you offered?
> What is the value of this share now (in $ terms, based on last funding)
> What is the strike price

11/ To clarify: ESOP can be allocated in various ways. In US companies, its usually ISO, NSO or RSU. The first 2 differ in tax implications (ISO better for most), but both mean you get AN OPTION TO BUY SHARES (post vesting) @ pre agreed price
RSU is different>more in another time

12/ So, in practice, you are granted the possibility, in due course, to buy shares of the company at (hopefully) a really good price, and make money from selling them at IPO or exit.

13 / Most ESOP offers will have a CLIFF (period in which nothing vests, usually 12 months), and VESTING PERIOD (can be 3-4 years), where every period you get the right to buy more of your allocation up to the agreed max.

14/ If you leave before exit (as many do), the company will give you time to buy the shares. This, called exercising the options, may be capped in time. US companies used to give 3 months for that.

15/ THIS IS SHORT – and means that if you got 50k options at $2 per share – you now need to come up with a $100k in 90 days, or lose out on it. That’s before discussing tax…

16 / In recent years (and in non US jurisdictions), companies learnt this is challenging, ending in 50-75% of employees not buying their options. As such, more advanced companies came up with longer durations (1,2,5 and even 7 years!) to offer more flexability.

17/ An eve more interesting mechanics that say the longer you stay in the company, the more years you ‘earn’ the right to exercise post leaving.
Either way – this is important – get clarity up-front!

18/ Second material issue is TAX. Today, for ISO, you can withhold tax for up to 5 years in the US. other jurisdictions are different – and this isn’t tax advice. In any case – you need to know the value of the options when you get them (when you join), and when you buy them.

19/ The valuation may differ from fundraising valuation at times (in the US its based on 409A – learn how its calculated) - so you need to ask about that asd well.

20/ You will usually be taxed (immediately, or at best can differ for a few years) on the ‘gain’, at income tax rate. If you live outside the US, you need to learn what does this mean for you, and when and what you need to pay for tax.
More here: carta.com/blog/what-to-k…

21/ A few more things you may want to ask:
> How many shares were allocated to the total option pull?
> Were this already approved by the board?
> Who needs to approve YOUR allocation?
> Can you be notified when they do?

22/
> Are you allowed to sell options when (or before) you convert to shares?
> What conditions apply?
> What happened if company exits before you are fully vested?

23/ For those who are already working in a company for several years, learn when will the options expire (usually 10 years from granting if you don’t exercise), and lastly - you may also want to know what happens to your vested options if you are fired – just in case…

24/ To be able to compare the value of the proposition, try think through what’s the value of the company today & what might it be at exit. Assume your ownership may be diluted by 20-40% (depending on the stage), but still, owning 0.1% of $1b company, is $1m – not too bad…

25/ As for founders, we are a young industry, and this is all new. It’s our collective role to make sure we don’t just offer equity, but back it with clarity oncost and tax implications, and are being brutally honest about what we’re offering inclusing on the potential upsiade

26/ So we start the journey with our key people with the right state of mind.

Feel free to comment, ask, RT or discuss – and nonetheless – join our Space on the matter tonight:

#AfricaTech #AfricaVC

For more reading on the matter:

Value of ESOP: carta.com/blog/value-equ…
How to compare offers: sleeperthoughts.com/post/options
aelex.com/the-lirss-noti…
A great guide on options across markets: indexventures.com/rewardingtalen…
Some more on stock options US tax: carta.com/blog/stock-opt…