Employee Stock Options: Rules on Giving Startup Stock Options to Employees

Founders usually treat the option pool like gold, as they should. Options represent the stock of a company and if you think that stock has real value, generally the thinking is you shouldn’t hand it out like candy. While founders want to ensure they maximize equity in their company, this article will review the rules on giving startup employee stock options as well as why it’s a good idea.

Examples of Emphasizing Ownership

The New York Times highlighted one CEO that bucked that trend. The CEO and founder of Chobani made sure that every full-time employee of the yogurt company would receive an ownership stake.

That portion, now owned by about 2,000 employees, could be worth up to 10 percent of the company.

Employee Stock Options

The Average Employee Stock Options for Companies With More Than 50 Employees

Recently we looked at a successful startup with 50 or more employees whereby every employee had options with a 4-year vest and 1-year cliff.

The ownership for each employee ranged from 0.01% to 0.91% with an average of 0.10% and a median of 0.02%, when we excluded founders. In total, the 50+ employees own ~7% of the business.

Aside from making the cap table much larger (which doesn’t matter), what were the other effects?

4 Effects of Giving Employees Stock Options

1. The company’s employees are incredibly loyal.

Even at positions where turnover is expected to be greatest, employee retention is phenomenal in part because they own equity.

2. The company’s employees are productive.

The employees want to work hard in part because they own upside. As a result, revenue/employee is high and the business was able to reach profitability on very little capital relative to peers.

3. Employees work for below market salaries.

Because they love where they work and feel like they have upside, even though the company is located in a high-cost city, employees are working for below market wages. In their view, the equity ownership is part of their compensation, so they’re willing to take lower salaries. As a result, the company has been able to conserve cash.

4. Employees have an incentive to stay.

Employees that don’t stick around lose options. This is different than venture capital ownership.

Because these options have a standard 1-year cliff and 4-year monthly vest, the employees only keep the options if they meet those retention criteria. If you’re unfamiliar, a 1-year cliff means that an employee must stay at the company at least 1 year from the option grant date in order for the first 25% of options granted to become theirs. If the employee leaves on day 364, they get nothing.

The 4-year monthly vest thereafter means that the employee will earn the remaining 75% from day 366 through the 4th year on a monthly basis. Each month through the 4th year, 1/48th of that employees’ options will vest. Employees that leave before the vesting period ends forfeit any unvested stock back to the option pool.

The Success of Giving Employee Startup Stock Options

Chobani goes on to state that it’s a private company:

“estimated to be worth $3 billion to $5 billion two years ago. When it sells or goes public, the average employee could receive a payout of about $150,000. Because the shares granted vary based on tenure at the company, some employees could receive as much as $1 million.”

This shows granting options to every employee can be expensive if you’re successful, but then again, if you’re successful, it really doesn’t matter that you gave up some upside especially if your employees helped you get there.

Sammy is a co-founder of Blossom Street Ventures. They invest in companies with run rate revenue of $2mm+ and year over year growth of 50%+. We can commit in 3 weeks and our check is $1mm. Email Sammy directly at sammy@blossomstreetventures.com.

  • Originally published September 3, 2019, updated April 26, 2023