Entrepreneur must read some hard knowledge startups about options
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In this paper, according to the overseas structure, it is the company that issues the main body of the option in the Cayman Islands or BVI, because the law is simple and clear and is still the main way. The domestic options are later mentioned (all the cards in the company and the individual you are willing to agree on the law but not allowed above).
How is the option designed?
The general terms are: the grant price and the commerce date; the four-year exercise; the work is one year, the vest is 1/4 of the full amount, and the rest of the month can be The remaining part of vest is 1/36; within 90 days after leaving the company, it has the right to pay the company the value of the stock that has been vest at the exercise price, and the unvested portion is cancelled. (Of course, legal documents have a much stricter representation)
My suggestion: Everyone is designed according to the common plan, and there is no special reason to change it.
The current stock option system has created many great companies in Silicon Valley and around the world. Numerous lawyers, venture capitalists, and entrepreneurs have been constantly improving. The general terms are mature, the choice of vest time, the process of vest, and many more. The details of time and proportion have been refined many times. Most importantly, this is because they have been pushed back after experiencing the happy or painful endings of countless entrepreneurial stories. Many of the arrangements were not expected by the founders when they first founded the company.
People's energy is limited, and choosing not to innovate on the option plan is a manifestation of something that does not work. If you have experienced too many entrepreneurial stories in your own way and found out what the original design is unreasonable, then it is another matter.
Who is going to write the option file?
Several documents are required to implement stock options on paper. One is the Share Incentive Plan, this is what we call the option file. The option plan for the VIE period of the People's Network is 36 pages, 320 paragraphs, more than 100,000 characters. In addition to a dozen or more pages of frequently asked questions, it is obviously not written by professional lawyers. I suggest that if you don't have this thing yet, you must find a good law firm to write it again. I have worked with several large law firms in the United States, such as O'Melveny & Myers (OMM), Latham & Watkins (L&W), Gunderson Dettmer, Orrick, etc. (most of them have Chinese offices). The documents made by several of their partners are great, after all, this thing is very familiar for them. Although it seems that the cost of tens of thousands of dollars looks very high for companies in Series A financing, it is the legal cornerstone of the options field for the company's long-term development. This money cannot be saved. This money cannot be saved. This money cannot be saved.
With a reliable lawyer involved, the option settings will naturally be very clean. Basically, there will be no more disputes afterwards. In the future, even if a black swan incident occurs, lawyers will basically find the corresponding terms in this document. We just need to follow the provisions of this article.
This stock plan does not need to be signed by the grantor, only the board of directors passed the board resolution. Once the company is approved, the company has the authority of the board of directors (on behalf of the shareholders) to issue options. In other words, after the board of directors does not agree to be a shield, things can be saved.
The other is the Share Option Agreement signed by the company and the grantee. Each of these people's documents are different. This is to write the number of shares, the exercise price, the start date is just fine. Basically a page of A4 paper. Signed by both parties. This is good, you can press the bottom of the box. In addition, everyone has the right to ask for a long and long employee option plan document.
What's in the options file?
I joked that the rigor of the document can be seen by looking at the level of detail in the options file for the death of the option grantee.
If there are even low-probability events such as death, divorce, and disability, let alone the departure (active separation, passive separation), the company’s transfer of control (acquisition, bankruptcy, listing, major restructuring) The event is over.
As a person who has experienced a startup company for 10 years, and who has some interest in the law, these documents are a bit like a suspense film. From the time of going to see, there is no mystery. After watching the finale, I will go forward. Look through it to understand the need for a lot of plot settings. For example, when signing an option agreement, the spouse of the grantee is required to sign a consent letter to avoid the unreasonable defense of the grantee with the other half having rights and no obligations. Things like this are not hard to come by.
It is all right to hand it over to the lawyer. The handling of these situations is also rule-based. Because it didn't happen and everyone thought it was a small probability, it was easier to follow a reasonable way when you agreed in advance.
Leave the job?
If it is a stock option, what should I do when I leave the job? When leaving the company, you can get the stock by multiplying the number of options already vest by the money corresponding to the exercise price at the specified time (usually 90 days). This does not require signing any other documents. The things of the options are all good when you enter the job. You don't need to talk about the options when you leave the company. Just follow the agreement.
The unilateral re-talking of options when leaving the company is a rogue.
Will you give the company money to leave?
Correct. Usually the 90-day option grantee after the departure is required to decide whether the vest part is exercised or not. An option is the right to “buy†a stock, not the right to “sell†a stock. The option agreement only guarantees that you can buy the company's stock at a fixed price, not promised to sell or at what price. This does need to be entangled. Based on the judgment of the company's future, the exercise price, the total number of options, etc. can be comprehensively considered.
Can you not give money? This is back to the basic principle of option setting, which is fair. The grant price of an option is the fair market price, neither biased nor biased toward employees. From the US accounting standards, if the founder and the original founding team can make the company’s first day’s value zero, it is still fair in the company’s development process, especially after a round of financing. The price is zero is not appropriate.
No. 37 text?
In China, there is indeed a very special provision. It was originally called the SAFE No. 75 document. I really carried the name of this article down, which is called the State Administration of Foreign Exchange. Notice on Issues Related to Foreign Exchange Management of Corporate Financing and Return Investment
It does make people fall into the dilemma of being able to register with the SAFE even if they are shareholders of overseas companies. Therefore, our former foreign employees appear in the Cayman shareholder list, and Chinese employees have no way because of this restriction. It is common practice at the time of the company's departure to give the employee an extension of the authorization to extend the option from 90 days to 10 years and to ensure that any future changes allow the conditions known as true shareholders to change as soon as possible. This is essentially guaranteeing the long-term ownership of the employee's options.
The current No. 75 document has been replaced by Circular No. 37, which stipulates that the option grantee, not just the founder of an offshore company, can also register for foreign exchange. In fact, the law stipulates that the actual regulations are still uncertain due to different implementations, but the company is obliged to fulfill its own commitments under the realistic framework of China. At this point, the option grantee can be assured: the company's management, the board of directors can not deprive this part of the power through a resolution or a decision, or reduce its obligations on the grounds that the external environment does not support. Otherwise, it will not be legally supported by a board meeting with a company to pass the resolution to identify the house of the next-door Lao Wang’s house as its own company.
Can I cancel it at will?
Have you ever discussed with a lawyer who helped us write an option file, can the company cancel employee options on the grounds of employee fault? The answer is to follow our options file, no. The options issued are like wages. They have no right to declare at will. Because of the employee’s fault, the wages in the previous two years are invalid, and you are entitled to refund all or part of the salary within three days. If the real employee is at fault, he must go through the legal process to prove that he needs compensation, and then take the compensation process, but the issued option is like the water that is poured out, and cannot be recycled. I actually know this very happy. This is the real guarantee when the company has no legal support for recovery. I recommend that entrepreneurs follow these terms to specify options.
Of course, if the option file says: The board can cancel any person's options at any time without cost and without any reason, then it has to do this, but few companies have written this when they were founded. If you really think so, don't just toss the option.
The option is yours, you can be strong
For the option owner, I still hope to give you some confidence, not to worry too much about China's legal system, because the VIE structure of the options are in accordance with the legal framework and litigation process of Cayman or BVI, and has nothing to do with Chinese law, all stocks The protection of disputes is a very international thing. Since the agreement has been signed, it will be fine to do it according to the agreement. The result of the breach of the agreement is quite certain.
In the next round of financing, especially the IPO, the founders, as well as the company, need to make a lot of guarantees and statements to the new investors (this part is as long and detailed as the option document), at that time, this is for you. The dispute over the ownership of the options held must be stated, otherwise it is a false statement, which is very big. When you are granted an IPO, you can also claim your rights in accordance with the provisions of the document. Therefore, the responsibility and pressure for a reasonable solution to the option dispute are all in the company. Sometimes a small embarrassment will lead to abandonment before the listing, let alone an option that does not honor this is a very significant event.
Option price
Options are subject to pricing. There are two times when the price of the option is required. One is when it is granted, and the other is when it is repurchased (of course, when the US also has the tax payment required by IRS 409a). This will basically be based on the Fair Market Value (FMV). When it is granted, it is the exercise price, which is usually a discount on the price at the time of the last financing. The discount is to reflect the difference between the rights of common stock and preferred stock. After all, ordinary stocks are the last to be used in liquidation, which has a great impact on the difference in value. This is the board of directors. The bigger the discount, the better the employee. However, for the US dollar structure, there will be a problem with the future listing of less than 2%, because the company can reasonably argue that this is indeed the lowest fair price of common stock, and it is more difficult to explain it.
Can I force a repo?
The company's repurchase price depends on whether it is a forced repurchase or a voluntary repurchase. We have made several voluntary repurchases in history, that is, we buy stock options at a price from time to time. You can choose to sell or not. As long as it is voluntary, the price is okay, if you are too low, you can not sell it and so on. However, forced repurchase depends on whether there is any such clause in the option file. Even if there is, the setting of the fair price becomes very complicated. If the option is challenged by the grantor, it is a common practice to ask a third party for advice, not the pricing of the board.
Note: There are a lot of financial and auditing problems in the middle. Once there is a common stock repurchase (even if it is only one share), this price is recognized as the new market fair price of common stock, and the company can no longer follow the previous The option is issued at a lower price, otherwise there will be a big problem in the future audit (the company needs to make up the difference). This is why repurchase needs to be handled with care.
Repurchase, as I understand it, is the company's efforts to provide employees with some liquidity. It is unwise for a company to resign and repurchase all shares when employees leave. 1) The price is difficult to determine. It is indeed impossible to price according to the price of preferred stock (that is, the previous round of valuation), but it is too difficult to define how many discounts. Forced pricing has a lot of cost and hassle. 2) Pay cash in advance. For startups, especially when the winter is coming, it is not good for the company to consume cash to get some people to get rich first (and to force others to get rich first by unreasonable means). 3) Even if this part of the stock is worth 1 million now and worth 100 million in the future, it is also the exchange of human sweat as an investment. Once vest is an investor, don't make money. I have never seen anyone who thinks that investors are making too much money. If stocks rise, they will be forced to buy back.
Principle behind
The above are some of the practical aspects of the discussion. But what really matters is the principle of permanence behind this. I hope that we will consider the principles behind the development of these documents when we make rules (that is, those legal documents) and follow the rules.
First, fairness and balance.
After reading so many legal documents and the principles of option design, my deepest feeling is the pursuit of fairness. Many good lawyers are also trying to be fair when it comes to the formulation of specific terms. It's like two people splitting the cake, one is responsible for cutting, and the other is responsible for picking the same. The founder is cutting the cake, and the options file is written by you, but the option is given to the person who is picking the cake. Legal documents that do not protect the rights of others' options, or failure to perform legal documents, will be discovered sooner or later. Employees can no longer choose your company.
The fundamental of institutional design is balance - by constantly adjusting the balance of interests and achieving maximum win-win. If someone has made too many partial arrangements for this program, the final blow to the enthusiasm of the core members will lead to a double loss. The more experienced VC I see, the simpler the Terminology in Round A, because they know that the more rights that investors fight for themselves (that is, themselves), in the latter round B, B The round will inherit these terms, and the A round will become a weak preferred stock, and the C round will enter the B and A rounds of investors relatively weak. Playing tricks on this clause, the ultimate harm is to include your own whole.
Second, prior agreement.
A team goes forward, and any agreement is better than no agreement. I am afraid that there is no agreement. So the option file is to agree on various events. This requires some professional help to draft situations that you can't think of.
The above is my understanding according to my own experience. I am not a lawyer or an auditor. If there is a common sense error, please leave a message to correct it. After all, this is not a trivial matter, you can't take everyone into the ditch.
(This article sources WeChat public number "Wang Jianshuo" (ID: jianshuo1), author Wang Jianshuo, CEO of the People's Network, a famous IT commentator and columnist.)
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