Startup stock option basics: exercise price, vesting schedules, mock scenarios and real-life examples.

1. START-UP STOCK OPTIONS 101
The regional leader in Middle East hotel bookings
https://www.yamsafer.me

2. ECONOMIC REASONING: EMPLOYEE
Your career is an investment:
LOW RETURN HIGH RETURN
LOW RISK CORPORATES GIFT ECONOMY
(DEGENERATIVE)
HIGH RISK MOST SMALL BUSINESSES START-UPS

3. OUTLINE
● The economic reasoning behind stock options
● Key terms
o Vesting Schedule
o Exercise Price
o Number of Shares
● Hypothetical scenarios
● Real stories

4. ECONOMIC REASONING: COMPANY
● Ability to attract and retain top-talent without raising too much money. Effectively raising money
from employees.
● Ownership results in extra care and dedication.
● Employees become long-sighted - optimize for lasting share value, not short-term gains.

5. PLACING THE RIGHT BET
● Do you believe in the team?
● How big is the market? How many players?
● Non-cash exit value (technology, supplier/customer relations, team..)?
● Current stage?
● Estimated value at exit?
● Estimated cash to be raised until exit?

6. IMPORTANT!
A stock option is the right to buy a certain
amount of stock at a pre-determined price.

7. KEY TERMS: VESTING
Typical vesting schedule: 4 years, 1-year cliff (25%)
12 monthsVesting
Commencement
Date
Vested: 0% 25% + 2.08% / month or 1/48 of total
24 months 36 months 48 months
100%
Important:
● Vesting stops upon employee departure
● Auto-vest during an exit event: 50-100% of unvested stock vests immediately

8. KEY TERMS: EXERCISE PRICE
$0
$1
$10
$9 SPREAD
OPTION IS “IN THE MONEY”
CURRENT TRADING PRICE
EXERCISE (“STRIKE”) PRICE

9. KEY TERMS: EXERCISE PRICE
$0
$1
$10
$9 SPREAD
OPTION IS “IN THE MONEY”
CURRENT TRADING PRICE
EXERCISE (“STRIKE”) PRICE
$0
$10
$12 $-2 SPREAD
OPTION IS “UNDERWATER”
CURRENT TRADING PRICE
EXERCISE (“STRIKE”) PRICE
NET RETURN = SPREAD * NUMBER OF OPTIONS EXERCISED

10. EXERCISE PRICE (OPTION 1)
EXERCISE PRICE (OPTION 2)
MARKET VALUE

11. KEY TERMS: SHARE OWNERSHIP %
NUMBER OF OPTIONS GRANTED TO YOU
TOTAL SHARES (FOUNDERS, INVESTORS, EMPLOYEE STOCK OPTION POOL)
% =
ISSUING NEW SHARES
CAUSES DILUTION

12. KEY ELEMENTS IN DETERMINING THE NUMBER OF SHARES
● Strategic contribution
● Stage of company when hire is made. Early employees
take on more risk. Companies are more generous with
stock options in early days.
● Salary/stock tradeoff

13. HYPOTHETICAL SCENARIOS
C-level, VPs,
Directors
0.5%-2% $300K to $1.2M $0.6M to $2.4M $1.75M to $7M $5M to $20M
Early and senior
employees
0.25%-1% $150K to $0.6M $300K to $1.2M $875K to $3.5M $2.5M to $10M
All other 0.05%-0.25% $30K to $150K $60K to $300K $175K to $875K $500K to $2.5M
$60M Exit
Payout
$120M Exit
Payout
$350M Exit
Payout
$1B Exit
Payout

14. WAZE: ACQUIRED BY GOOGLE FOR $1.2B
“Each of the company's 100
employees will be getting an
average of $1.2 million.”
HAARETZ

15. ALIBABA: $168B IPO
“The initial public offering on Thursday, which valued
Alibaba at $168 billion, will provide Silicon Valley-style
payouts. At Alibaba and its affiliates, around 6,000
current and former employees owned stock worth
nearly $8 billion before the I.P.O. And that sum
represents only a piece of the shares doled out over the
years to employees, some of whom cashed out earlier at
lower, albeit still lucrative, prices.” NY Times
“Alibaba employees have helped start 130 Internet
businesses. There’s Tongcheng, a travel website
founded by a former Alibaba salesman that has more
than 2,000 employees.”