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I received a job offer from a startup. Part of my compensation is supposed to consist of stock options. I have received a signed contract from the company but the contract only mentions the cash part of the compensation. Upon further inquiry about why the stock options were not mentioned in the contract, I was told that stock options are subject to board approval and that the board meets every 2 -3 months. The next time the board will meet is in around 2 months. I was also told that this is a formality and that there is no scenario in which the board would not approve the granting of stock options to me.

I would like to know if this is normal in startups and if I should look out for anything. Is it wise to sign a contract when the contract mentions only a part of my compensation?

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    If it stock option approvals are indeed just a formality then one would wonder why it was still omitted from the contract.
    – jla
    Jul 23 at 0:34
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    IMHO, stock options suck. The options allow you to purchase the company stocks at a fixed price, usually guaranteed. A stock grant is when the company gives you the shares without you purchasing them. I was once offered a stock option, then their stock prices went down, thus making the option worthless. Also, there may be a minimum quantity you have to purchase, like 100 shares. For me the stock was 60 USD$ and 100 shares minimum meant I had to spend 6000 USD$. Not a good deal. Jul 23 at 1:02
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    Corporate financial auditor here. Typically Board approval for individual awards or options isn't required. The Board would approve a certain number of shares (or options) that the CEO can approve without Board action. Maybe the Board at your start-up isn't this sophisticated, but I wouldn't call it normal, exactly. Perhaps delay your start date until the option/award is approved. See also Thomas Matthew's excellent comment about stock awards vs options. Make sure you know what you are getting. Jul 23 at 3:09
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    @indigochild: Please write that as an answer! Would hate to lose it as a comment. Jul 23 at 10:05
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    Be very wary of stock options in a startup. I worked for a very promising startup in the 80-90's, but they went bankrupt before ever going public so the stock options were worthless.
    – Barmar
    Jul 23 at 14:39

6 Answers 6

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Is it wise to sign a contract when the contract mentions only a part of my compensation?

If a specific compensation or benefit is not in the contract that you sign, then the company is under no obligation to provide it to you...EVER.

Don't fall for the "this is a formality and that there is no scenario in which the board would not approve" story. Many shady companies use this to trick unsuspecting candidates to work under conditions/compensation that they normally would not.

You should seriously reconsider this offer depending on how important the stock options are to you. As of now, you will likely never receive them.

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    In addition, if it is true, than it is simply a stupid workflow and speaks for the company. Jul 22 at 14:18
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    I think the EVER is important. The board might approve it now and then rescind the offer again in 6 months. If you complain they can simply tell you there is nothing in your contract stating they have to give you stock options. Jul 25 at 5:43
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    My previous job did that. "It's a formality". For almost 5 years. Needless to say, I never got any share or stock. So either ask for a proper signed document, or negociate something else... Personnally I used the false promise as a leverage to negociate a (big) raise later.
    – Mouke
    Jul 25 at 8:52
  • At the same time, there are many scenarios in which the options can't be granted until a board meeting, and are you willing to wait x months to start work with this business on that condition? While technically correct I think it's also important to only work for a business you trust. I've been on the wrong side of it before from living from this trust-first perspective. I still won't change it personally. All that being said, no mention in the contract is a red flag. It should be stated they're going to recommend the board grant x options at x date in the offer. Location would be helpful
    – TCooper
    Jul 25 at 17:43
  • @TCooper startup is in Pakistan, investors are from the USA so board is most likely American.
    – Rabee
    Jul 25 at 19:48
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If having stock options is a make-or-break condition for you, then you should probably seriously reconsider the position. As pointed out by others, unless it's guaranteed you should plan on never getting them - ever.

If having stock options in particular is not that important, then you should probably negotiate some wording in the offer which would give you something else of comparable value to you instead of these stock options in the event they're not approved by the board. Possibly a bump in your pay, or an unconditional guaranteed bonus of some kind - whatever works for you.

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    As others have remarked, stock options for a startup are extremely high risk and should be considered effectively worthless. The only case where I would not follow that rule is if the option price were significantly below the likely value of the company's intellectual property in the eyes of disinterested parties. This would be something along the lines of a quantum computing or AI breakthrough that is well protected by broad patents. Over 90% of startups fail. A tiny, tiny fraction are bought at a price that allows founders to retire. Employees after the first 20 or so might get a nice bonus. Jul 24 at 17:50
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The board having to approve stock options is routine. They do it in bulk, they’re not looking at you specifically.

Most companies just go ahead and promise them in an offer letter but there’s usually an approval and a “well you don’t get them till time X” detail they don’t always list.

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    In American corporations, it's not typical for the Board to approve each individual stock option. Typically they designate a certain pool of shares that the CEO can assign at their discretion. OP being in a start-up, there situation may vary. Jul 23 at 3:05
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    It may be routine, but glitches can happen. A friend got an offer with this included but the company was sold before the board approved them. He was compensated, but as others say there is no guarantee. Jul 23 at 4:20
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    In my experience - USA - this answer is correct but incomplete. It is true that the board approves them in "bulk" - everyone hired within a given period. And they don't pick out one guy and say, "Joe isn't worth 25000 shares, so not for him". What is happening is the board periodically sets the value of the shares. That depends on a lot of things but typically is strongly related to the trajectory they're looking for for share prices vis-a-vis funding rounds. At the offer they'll tell you "the last bunch of options were valued at $x.xx". But your round of options may be higher.
    – davidbak
    Jul 24 at 1:18
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    This is the correct answer. I have no doubt in larger companies, the board may pre-approve a whole pool of options, but in a startup, the reigns are held a bit more tightly, especially due to what can be an explosive growth of employees. Jul 25 at 9:41
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It's important to distinguish 2 questions here:

  1. Is it normal for stock options to be subject to board approval? Yes.
    This is nor a red flag by any means.

  2. Is it normal for stock options to not be mentioned in the contract? I don't know.
    I have not heard of this, but it may be something some companies do.

The employment contracts I've seen explicitly state something like:

Your compensation includes N stock options subject to approval by the company's board [...]

If they're not doing this, I'm guessing they have some honest reason for it. It's possibly a misguided one, but unlikely to be out of malice.

If you otherwise like the company, what I would do is the following:

  1. Confirm the date of the next board meeting for stock option approval.

  2. Ask a couple of ordinary employees if the board has approved their stock options yet.

  3. Accept the offer.

  4. Work for 3 months (1 month after the board meeting).

  5. Inquire about the stock options approval.

They should have approved it at that point. If they haven't, then something is fishy. At that point you could see if they have a good excuse (definitely inquire with coworkers to see if/when their options were approved) and let them know you expect it after the next board meeting in 1-2 more months (otherwise you'll leave).

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  • If the company assured the OP that the options were a mere formality that couldn’t help but be approved by the board, and then the board held their meeting without approving the options, that is a giant red flag that the OP should start looking for a different job immediately. In that situation, telling the company you’re willing to wait until the next board meeting will just make them think they can keep you “on the hook” indefinitely.
    – bdesham
    Jul 23 at 17:45
  • @bdesham: Well they'll be wrong if they think that. Again, that's why you confirm with other employees etc. I think the chances of this happening are low though.
    – user541686
    Jul 23 at 18:19
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The way I've observed this done, at least for US employees at a US company I've worked at that issued options:

  • New hires' offer letters described some details of the options grant they would receive, including the number of options but NOT the exercise price, and said that the grant was subject to board review
  • The board review was indeed a formality and everyone got their promised options
  • The vesting start date of the options was back-dated to the first day of work (i.e. it was as if your options had begun vesting as soon as you started work), but the exercise price was set to the official "fair market value" of the company based upon the most recent valuation at the time that the board approved the options.

These conditions are obviously not ideal from your perspective as the employee. You would like it if you could be granted your options immediately on day 1 of work, for two reasons:

  • It eliminates the risk that your employer will screw you over and not grant you the options they've kinda-but-not-quite-promised to you.
  • If the company has a valuation performed between your first day of work and the board meeting when your options are approved, and it happens to result in a significant increase in the company's official valuation, then your exercise price will be higher to reflect this, which reduces the value of your options

So why do companies operate this way? My understanding (which some online sources seem to corroborate) is that it's to avoid legal complications, in part to protect the company and in part to protect you.

  • Corporate law in the US generally requires documented board approvals for options grants. See e.g. Stock Options: Don’t Forget Board Approval on the Startup Law Blog, which says

    Why is it important that you promptly and fastidiously document board approval of stock option grants? Well, because if the options haven’t been approved by the board, they haven’t been appropriately awarded under the corporate law. This can give rise to a variety of complexities and problems.

    (I'm not really clear on what would happen if a company didn't follow proper process on this. Would it be as if the options hadn't been issued? Surely part of someone's compensation can't evaporate years down the line because of a bookkeeping error by their employer? I imagine most companies would rather not find out how any of this plays out if they get the bookkeeping wrong... and probably you, as an options recipient, would rather never have to find out either.)

  • There are horrible tax consequences for YOU if the company grants you options whose exercise price is less than the fair market value of the stock on the date of the grant. Per law firm HansonBridgett:

    The general rule is that the exercise price of the stock option cannot be less than the fair market value of the stock underlying the option determined on the date of grant. If an option is granted with a discounted exercise price, the tax consequences for the employee or advisor receiving the option can be severe. In order for an incentive stock option ("ISO") to qualify as an ISO, the exercise price of the stock option cannot be less than the fair market value of the stock underlying the option determined on the date of grant. An ISO granted at a discount is automatically re-characterized as Nonstatutory Stock Option ("NSO"). An NSO granted at a discount is in violation of Internal Revenue Code Section 409A. A violation of Code Section 409A results in the employee or advisor being taxed in the year the option is vested (instead of when the option is exercised) and the employee is subject to a 20% penalty tax on top of income tax.

    These all sound like things you don't want to happen to you!

In summary, then, this is a conventional way for US startups to operate, and by itself it is not a sign that your prospective employer is doing anything shady. It does have some consequences that are adverse to your interests, but those are almost certainly not the reason the company is doing things this way; rather, they are simply ensuring they comply with the law. As such, there is no sense in fighting over these terms; it is likely the company wants to offer you better ones but dares not do so out of fear of the law, and all you can do, like them, is grudgingly accept it.

As part of this standard way of operating, the company probably does get the opportunity to basically scam you by not issuing the options they promised you, and you would likely have no legal recourse if they did. However, I would not be too worried about this possibility unless they have acted in other ways that give you cause to distrust them. Frankly, the cost to a startup of pissing off an employee and having them quit a few months into the job is likely greater than any benefit they'd get by clinging on to a little bit of extra equity, so your employer would have to be both evil and stupid to decide to stab you in the back in this way.

To the extent that there's something to be annoyed about here, you should be annoyed at your politicians, who have created the legal environment that compels companies to operate this way, and not at your employer themselves. Their corporate counsel has likely insisted they handle options grants this way to avoid legal trouble.

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  • Nice, very complete. Good links too. ☞☞☞ This is the answer! ☜☜☜
    – davidbak
    Jul 25 at 19:49
  • I'm not entirely sure about "no legal recourse". You've got the offer letter. You could probably sue. And they could probably defend in some way. This would be a nice question for the law stack: to what extent is the offer letter a contract if you actually start work and are in good standing and all the other parts of the offer letter have been fulfilled ...
    – davidbak
    Jul 25 at 19:52
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This is perfectly normal and cannot possibly harm you in any conceivable way.

First, only the board of directors can approve a grant of stock options to an employee and typically the type of grant they are making can only be made to an employee. There is no way they can put the stock option grant in your contract because only the board can authorize the grant and the board can only authorize the grant to an employee, which you won't be until after you join the company.

Second, there's no scenario in which this can harm you. Say it's six months down the road and the stock option grant wasn't approved for some reason. Because you can quit, you are no worse off than if they fired you. And your stock options wouldn't vest for a year anyway.

Remember, the point of offering you the stock options is to keep you from quitting for at least a year. They can always fire you within the first year and none of your options will vest. So there is absolutely no conceivable way this could be a ploy.

If they wanted to trick you, they'd assure you a large number of options and fire you within a year so they don't have to actually give you anything.

The board receives a list of stock option grants proposed by management, typically at each board meeting. There may be some discussion of unusually large grants for high-level executives. But it would be nearly unheard of for the board to refuse a routine grant to a new employee who wasn't at a very high management level.

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  • You'd probably want to make sure the vesting period isn't impacted. Jul 23 at 8:47
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    But I think you're wrong that there is no harm. If the options don't materialise, the OP is impacted. They vesting period doesn't remove the impact. Jul 23 at 8:54
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    The board can't fire employees. Unlikely the company will fire someone to get what will be a few thousand worth of shares. Doesn't make sense. Jul 23 at 9:28
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    There's clearly an opportunity cost here: the OP could have gone to work for another company, or remained in their current role. Jul 23 at 17:51
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    @DavidSchwartz In addition to all this, your baseline assumption is the OP is at-will. When I have been awarded options held in trust, I only lose them if I've been fired (as opposed to being made redundant). Even in at-will environments, the OP can still have legally binding contracts. A global statement that "is perfectly normal and cannot possibly harm you in any conceivable way" is blatantly wrong for a lot of people. Jul 25 at 9:37

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