Compensation · Equity

Offer letter for future hire - stock option amount contingent on business milestones?

Justin Randolph

December 7th, 2016

Hi all,

I'm currently writing an offer letter to a previous intern with a start date in July 2017, which includes a stock purchase agreement. However, between now and then, we're raising a round of capital, and depending on our fundraising successes and/or challenges, that will determine the level of risk the employee will implicitly be assuming by joining the team in July (currently finishing an MBA and is not able to begin full-time at the moment). 

We're both comfortable with this in principal, but I was wondering if any had suggestions as to logistically how to reflect the dynamic nature. 

For instance, would it be recommended to put into an offer letter that compensation would include the option to purchase shares- guaranteed to at least be within a range - that's finalized at a later date when we understand the inherent risk involved? To be more specific, any cautions or suggestions as to guaranteeing the option to purchase shares in an amount between X and Y, whereby the lower amount of X would be offered if between now and July we hit certain funding and business milestones, or Y would be offered if we fail to hit such milestones? 

Many thanks!


Mike Moyer

December 8th, 2016

If you use the Slicing Pie model, you will be able to properly allocate shares based on the person's contribution (Slicing Pie is a dynamic model). This will work prior to raising money.

After you raise money, your stock will have a value. You can convert his contribution into shares.

For instance, if his contribution/bonus have a fair market value of $10,000 he would get 20,000 "slices" in the Slicing Pie model (a slice is a fictional unit for measuring contributions).

Or, if you have a priced round, you can apply the unpaid $10K to a stock purchase (I recommend doing a 2-1 buy so $20K in stock).

David Rowell CEO & Founder at LifeLinker Inc

December 7th, 2016

Unless your intern is insisting on definite specifics (which would be a bad sign) I'd suggest you keep it vague rather than trying to anticipate all sorts of scenarios, and still probably end up with something unexpected!

Furthermore, the whole concept of allowing an employee to buy shares, rather than being given shares or share options, is slightly out in left field.  Just who exactly is doing who the favor here!?  Not only is there almost surely considerable risk, but the value of the shares will probably be a very vague sort of concept, because there won't be a free open market for trading in your shares (I presume that you have a startup that is still full of risk and some distance away from an IPO or any major market valuation validation).

I also don't know if 'qualified investor' considerations/restrictions apply to employees or not, but it is something hopefully some other response will advise you on.

You have to be careful here - if you are trying to equate a specific value to this dubious privilege, then there's a small risk/liability you're opening yourself up to if the value is not realized.  I suggest you view this as a nebulous and impossible to quantify additional benefit, rather than part of the core package you're offering.

The reality is that sure, the person could buy shares at a theoretical high value/low price, but could they then immediately sell them on and make a profit?  If the answer to that is no, and I'm guessing that is indeed the answer, just how substantial a benefit are you offering?

So I'd suggest going vague on things and say something like

Part of your total employment package will be an opportunity to purchase shares in the company at below market value.  We can not today predict what the market value will be in July 2017, and indeed, because we are not and will not be a public traded company, the market value is hard to establish in any case, and any such purchases of course come with risk and no guarantee of appreciation.

It is our intention to encourage employees to become shareholders, and to issue some shares to employees for lesser amounts than we are generally selling them for to other outside investors.  We'll talk the specifics of how many shares, at what value, and the basis for setting that price, subsequently.

TL;DR - I think the whole concept is a bad idea.
 

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

December 8th, 2016

This sounds a lot like the concept used in pricing convertible venture debt, where the conversion price is set at a future date based on a fairly negotiated venture round. Be careful with the details and make sure the tax aspects are well known in advance.

Peter Liepmann

December 13th, 2016

Look at "Slicing Pie."

Renee Zau Founder of DonationMatch and SamplingforGood, Cause Marketing Guru, Startup Mentor, Fundraising Event Consultant

December 8th, 2016

I'm curious why you are making an offer this early if there is so much uncertainty. Is the soon-to-be employee asking for a concrete offer, are you trying to get a commitment, or is this a part of your fundraising strategy? If you trust each other (which it sounds like you do), could you wait a few months until there are fewer unknowns?