An example of employee option Problems

Problem:

A friend recently joined a company and the company is about to get venture capital. He is now talking to his boss about the treatment. Please explain to me:

1) which of the two methods is more beneficial to protecting the interests of the parties?

2) What is the concept of equity (option? How to determine the relationship between the two parties' equity (options) by law? Can you provide a contract (agreement) template?

3). The implementation of the proposed equity (Exercise) by the capital, (10% of the equity) should be 4-3-3 (can the annual share ratio be changed to cash or sold ?) What proportion of execution is more beneficial to the client?

Reply:

Stock option is just a right. You can choose
1> execute this right (Exercise)
Or
2> give up this right.

If you choose to execute, you must buy these shares at the specified price (exercise price), so you become a registrant holder and you own the shares.
If you choose to give up, nothing happens, and your right becomes a piece of waste paper.
In terms of stock option plan, three concepts are very important. Let me give an example:
For example, you receive the company's stock option of 1000 shares, with an exercise price of $0.50, an expiration date of 10 years after the grant, and a schedule of equal vesting over four years.
1> granted date is the day when you receive the option, but those options do not really belong to you. You must wait until they are vested,
2> During the vesting period, generally, the company's vesting period is four years, and vesting25%each year. That is to say, although you are granded these shares, they are not available. even if you want to exercise, you can only run 25% after vested every year. 25% a year. four years later is fully vested. the company designed such a plan to retain key employees in this way.
3> excersice and excersice price remain unchanged. if you stay in that company within 10 years, even if the company's stock price is already 1 thousand yuan, your purcahse price is still the original price. The above example is 0.50.
When your equity is partial vested or fully vested, you can choose to execute or not. if you leave the company, you must enforce or give up after you leave the company for a period of time. If you stay in the company, you can never execute for the longest period of time, in the above example, the maximum period is 10 years ..

Whether to execute or not depends on many situations. One is the company's operation and the other is your own tax.
However, if you execute the statement, you are the registrant, and your equity becomes the stock certificate. if you are a listed company, you can buy and sell it as needed. in short, equity is the investment you have not spent, and shares are the investment you have spent.
As for your friend's case, it is difficult for others to draw conclusions before they know many specific situations.

Problem:

Tanks for your explination and it is really rewarding... you 've given me a good lessson... so I have some following questions and please, at your convinience take time to explain further (marked ):

The case is that my friend (actually a relative of mine) is huntered as a sort of CTO and granted 10% (Sorry, options) of that company, which was registered at a Hi-Tec zone in China. the boss (share holder) did not offer him any salary but granted this 10% share, and their project might be invested by VC within months. their long term goal is of course to be listed on Nasdaq or somewhere, but not now, before they can really get VC or some investors... so my cusin is concerned that if he shocould accept this position:

1) if this sort of operation is normal and in a Chinese HR enviroment, if he can really get what had been granted and promised?
2) What sort of legal procedures or statements could both of them sign or agree upon... to guarantee his right? Have you got some legal samples like this?
3 ). if the company is not public listed, how big is the risk of my cusin since he might have no income before they have got the VC, or if the company operation failed or not profitable.
4 ). in general, how to define the inner limit exercise price (you said $0.5), is it an average price or differ by Industries... or just random chosen (like $ 0.8.who and when to define the shares (who will define how many shares shoshould be issued ?)
5). What is the grant date, is it the date when they sign the above-mentioned contract or at some sort of milestone of the company operation? (Got VC, an appointed random date or when public listed ?)
6). 10% is a reasonable and acceptable offer for all the risks? Suporse It is not public listed)

Reply:

1> the stock option is an agreement. A document of legal, a section in my example should appear in such a document. grant date is generally the day when you signed the document, and it has nothing to do with investor investment. according to the habits of the United States, only signed documents have the true meaning of legal.
2> what your relatives want to go to is like a start up company. If you don't receive a salary, you only need to use the stock option. This is a very high risk. the first question is what kind of life does he rely on in the years to come? The second problem is that if the company does not do anything, his time and energy will be free of charge. his willingness to take this risk now depends entirely on his identification and determination of the company's prospects. if you can negotiate with the company, I suggest that you pay at least basic salary for food. in case the company cannot do it, it won't lose much, even if it learns some experience.
3> 10% of a company's assets can be big or small. If the company is as big as Baidu, 10% of its assets will be a high price. If the company fails to do so, it will be a dream.

These are my personal suggestions on the U.S. environment. I am not very clear about the Chinese affairs. I may also ask for comments from other xdjm.

In addition, I would like to add a few words: first, when you leave, the company generally has a plan to repurchase your option, so your option can be directly sold to the company; second, the option of a listed company can be bought or sold. You can sell the option directly. 3. The option income should be paid as income, and the stock income should be paid as capital gain tax.