A job offer letter contains information about the job, compensation, and other important details related to the position. But not all job offers are created equal—some of them come with stock options!
A stock option offer letter is a formal document issued to an employee or contractor, giving them the legal right to the options. It sets out all of the specific terms that apply to that individual employee or contractor, including the number of options they get, the vesting that will apply to those options, and the price they have to pay to exercise them.
As a startup founder or employer, offering stock options is an effective way to attract and retain top talent. It is important to understand what stock options are, how they work, and what to consider before including them in an offer letter.
Stock options are a form of equity compensation that allow employees to buy a certain number of shares of a company's stock at a predetermined exercise price. The value of the options will increase if the stock price increases above the exercise price. This can result to significant financial gains if the company becomes profitable, which is why this is good way to incentivize employees to play the long game in contributing to the company's success.
Learn more about startup stock options.
Offer letters with stock options are essential tools for startups. An employee compensation package that includes stock options can be an attractive incentive for prospective employees, especially in a startup environment where there is potential for significant growth and financial reward.
Creating an offer letter with stock options, therefore, requires careful consideration, as well as legal, accounting, and financial review. A poorly drafted offer letter can lead to confusion and misunderstandings down the line, which can ultimately harm both the employer and the employee.
When drafting an offer letter with stock options, there are some best practices to keep in mind to ensure that the document is clear, effective, and legally binding. Here are some tips to help you create an offer letter that meets your needs:
In the Cake platform, the Offer Letter comes built-in with your equity plan. Reviewed by lawyers and used by hundreds of startups around the globe, it removes a lot of the research and guesswork while giving you room to still customize Offer Letters to your needs.
In the Cake platform, we refer to these documents as the Plan Rules and the Offer Letter. These two documents should be read and understood together.
The Plan Rules set out the rules and processes for option-holders and stockholders. You can think of the Plan Rules like an additional Stockholders Agreement that only applies to employee stock option recipients. Plan Rules provide full transparency, helps avoid disputes, and gives the company peace of mind that it’s protected in various scenarios.
Generally, the Plan Rules includes terms that apply to all the recipients of the equity program:
The Offer Letter, on the other hand, contains information that are specific to the option-holder:
In some jurisdictions the Offer Letter is referred to as an Equity Compensation Agreement or a Stock Option Agreement.
Cake's Plan Rules and Offer Letter templates are reviewed by lawyers and used by many companies around the world. It prompts you to fill in these details and automatically populates the applicable restrictions into your Plan Rules and Offer Letters.
Yes, you can customize the terms of the stock options for each individual employee. Terms such as the exercise price, the number of options, and the vesting period, are usually specific to the individual, depending on unique factors like start dates and position.
Offering stock options can benefit your company by attracting and retaining top talent, aligning employee interests with company success, conserving cash, and providing tax benefits. It can also motivate employees to work harder and be more committed to the company's goals.
Yes, offering stock options can lead to dilution of ownership if the number of outstanding shares increases. However, it is important to balance the potential for dilution with the benefits of offering stock options.
If an employee leaves before the vesting period is over, they may forfeit their unvested stock options. However, some companies offer accelerated vesting in certain situations, such as termination without cause or a merger or acquisition.
It is not necessary to offer stock options to all employees. You can limit stock options to key employees or offer them as part of a performance-based compensation plan. It is important to consider the company's goals and the roles of the employees before deciding who should receive stock options.
Cake allows you to create legal contracts, send them for signing, and automate your contract management, all in one place.