Equity Agreements

What’s in an Equity Agreement?

Mar 2, 2023

It’s common to get a 30 page document as your equity package. It’s not common for people to understand what’s in there. The process is confusing and painful, yet understanding is critical to evaluating your offer.

This week’s blog post covers the most common aspects of your equity. It’s a big topic, so let us know where you’d appreciate deeper dives.

The 5 Dimensions of Your Equity

You’ve been granted the option to buy 100,000 Shares at the Fair Market Value (FMV), Congratulations! Time to check the fine print.

  1. Equity Type: ISO, NSO, SAR, RSU, RSA, and more!

    What equity did you actually get? Startup companies typically offer two types of Options (Incentive Stock Option or Non-qualified Stock Option), two types of Stocks (Restricted Stock Units or Restricted Stock Awards), and more rarely Stock Appreciation Rights. Each type of equity has its unique set of tax implications, exercise conditions, and expiration dates.

  2. Vesting Period

    How long does it take to receive the equity, and is there a cliff? The industry standard in Silicon Valley is 1 year cliff, 4 years vesting. This means you are given the first 1/4 of your equity in a lump sum after spending 1 year at the company, and another 1/48th each month after, with all of your equity received at the end of 4 years at the company. If you leave before your first year is up, you don’t receive anything, and if you leave before the 4 years are up, you won’t get 100% of your grant.

    If the control of your company changes, like a merger or acquisition, and particularly if your employment is terminated with this change, an ‘acceleration’ may be triggered to automatically vest all remaining equity.

  3. Termination & Expiry

    What happens if you stop working at this company? On average, vested and unexercised options expire between 30~90 days after you leave, with extensions to 6 months or longer in cases of leaving due to death or disability. This period of time is called the Post Termination Exercise (PTE) window. If you stay at this company, options usually have an expiry of 10 years from the date of issue.

  4. Repurchase

    Can this company buy your equity back? Typically, unvested and early-exercised options can be repurchased at your original purchase price after you leave the company.

  5. Sale: RoFR, Lock-Ups, and Blackout Periods

    When are you allowed to sell your equity? There are rules before and after IPO. Prior to an IPO, your company may have the Right of First Refusal (RoFR). That means in cases where an external buyer gives you an offer, your company has the right to buy your equity with the same terms first to protect against ownership dilution.

    Immediately after IPO, your equity can be subject to up to 180 days of ‘lock-up period’ before you can transact. It’s common to have black-out periods that limit transactions throughout the fiscal calendar to prevent insider trading.

These dimensions are often scattered across dozens of pages. Ginkgo's report contextualizes the facts for your understanding so you can communicate your expectations to potential employers.

I typically spend half a day or longer trying to understand these agreements. I didn't know it was possible for long paragraphs of legal jargon to be summarized into 1 sentence!

- Machine Learning Engineer, Financial Services

For advocacy and beyond!
The Ask Ginkgo Team

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