Global Founders Headache #8: Mastering Employee Stock Options (Part 1)
Let's demystify stock options! This is your guide to understand the philosophy behind stock options and key concepts to empower you to build a strong "equity culture" in your startup.
Founders and employees have a love-hate relationship with stock options.
When properly implemented and aligned with strong company performance, it’s a brilliant tax instrument to share value created (just ask early employees at Airbnb or Stripe). That’s the “love” part 💜.
Can you guess why we also hate stock options? Well, there are two main reasons:
Unpredictability of liquidation events at startups. Let’s be real—stock options can feel like a golden carrot dangled in front of grinding startup employees. Who wants to be rich on paper? The reality for most startups is a bit... disillusioning.
It’s a tax headache with many opportunities to screw things up. Stock options offer tax advantages (usually lower tax rate than income tax), but one misstep—missed deadlines, incorrect filings, or international employee moves—can erase the benefits and leave you with a headache instead. You get why it’s the “hate” part. 🤭
There are alternatives, though equally imperfect. So, we believe it’s best to stick with the devil we know—stock options remain the fastest and most cost-efficient tool, especially with established standards for Delaware holding companies (yet another point for U.S. offshore incorporation). Read on to explore these alternatives and form your own opinion!
For global companies, setting up an equity compensation plan that meets tax regulations across multiple countries, especially pre-product-market fit, might seem like an overkill. But if you’re serious about your company’s success, issuing stock options correctly from the start is essential. If these aren’t handled right, employees' potential gains could vanish just when it matters most (at exit, secondary, acquisition, or IPO)—and fixing these mistakes later is costly, if not impossible.
We know, managing these admin headaches isn’t what inspired you to start your company…! but how about shifting the paradigm? You could see this as an opportunity to level up in talent management. It’s not just about stock plans; it’s a chance to shape an incredible culture of ownership— at the end of the day, a strong team is everything for success.
Our goal is to demystify these admin headaches by sharing practical mental models and tools to make your life easier.
In this first part, we’ll break down stock options by covering:
Understanding Stock Options: Core Concepts,
Cultivating an Equity Culture, and
Exploring Alternatives
SPECIAL PERKS: To make it more actionnable for you we also pulled together some exclusive resources! Customizable employee offer letter with an ESOP simulator, an onboarding deck to guide your team through stock options, plus a case study and quiz to put your knowledge to the test.
By the end, you’ll have all the insights to empower your team—and keep your sanity intact. Sounds exciting, right? 🙄🤭
Stock Options: Key Concepts
It’s an Option to Purchase Stock at a Fixed Price
A stock option is a type of security that grants your employees the right to purchase your company shares at a predetermined, fixed price.
An option. It’s a right, not an obligation. The beneficiary can choose to exercise their option to purchase shares or not—hence, the term "option". It’s one option to purchase x number of shares.
At a fixed price. A stock option is granted for free, but exercising them means buying the underlying x number of shares at the “strike price” (or “exercise price”) set at the time of the grant.
Let’s pause here. Stock options are exciting only if company’s value will grow over time—otherwise, there’s no value to share. If the market value of shares exceeds the exercise price, the holder gains from the difference—this is the “gain”. However, if the market value is lower than the exercise price, it results in a poor investment 🙊 oops.
A stock option’s payoff usually comes during a liquidity event (like a sale or IPO):
Gain = (purchase price x number of shares) - (strike price x number of shares)
Thus, if you made a good investment, the “purchase price” will be superior to the strike price. The purchase price is the price a buyer pays to buy your shares.
That’s the bet for your employees! Today’s top talents are more risk-averse, so to attract the best, you’ll need to offer a competitive salary AND an equity package. They know the equity part is a bit of a gamble, so they won’t take a cut of salary.
It’s also a Tax Instrument
Stock options are also a tax incentive to attract and retain team members, with two key implications: employee tax residence and a precise legal process to maintain advantages.
Employees’ Tax Residence
Tax benefits vary depending on the employee’s country of residence.
In emerging markets, stock option regimes often don’t exist 😒, meaning there’s no tax benefit compared to regular income. Sooooo why bother with stock options? Simple: U.S.-style plans are easy to set up and administer with tools that automate and track grants. We’ll cover alternatives in the last section.
Some of the most favorable tax regimes for stock options are in Eastern Europe (Latvia, Estonia, Lithuania) as part of policies to create a favorable startup environment and attract talents. Other top locations include Israel, Canada, France, Portugal, and the U.K.
Index Ventures created a helpful handbook, “Rewarding Talent”, which reviews these regimes by country. They built a lovely score card … that’s our type of content ❤️.
If you are dealing with countries with favorable tax regimes, setting up a locally compatible stock plan can make sense, attracting top talent. Otherwise, without tax benefits, gains from stock options are typically taxed like standard bonuses.
Strict Legal Process
To ensure tax advantages and avoid creating risks for your company and employees, you must meet legal requirements, including filings and deadlines.
Let’s review common missteps to avoid:
Misstep #1: Valuation
Unless granting options at company formation, you need an independent third-party valuation (the “fair market value”). The strike price is based on this valuation and must meet tax code standards, typically documented in a 409a report.
The advantage: fair market value is often around 60% lower than the last VC round valuation due to objective valuation methodologies.
🏡 Bringing it home: consider the 409a valuation as a floor and your last VC valuation as your cap. You can gant stock options to your employees or advisors at any price in between the floor and the cap.
Misstep #2: Company Approval
Breaking news: Issuing stock options via cap table software alone doesn’t legally create the securities. Unfortunately, you do need formal board and stockholder approval to establish the plan and subsequently approve the valuation, terms, and recipients. 💡 Pulley, a captable software, has a new feature allowing to send board and stockholders approval through their platform and then issue stock options.
⚠️ Stocks promised via email, offer letters, or stock option agreements aren’t validly issued without completing this process.
Don’t worry, in our next edition, we’ll share an ESOP legal process tracker and tips to manage stock options grant like a pro!! Don’t miss out, subscribe to our founders friendly content 😇
🏡 Bringing it home: you need a the board of the company to approve the stock options grants, the valuation, and the terms. Even if YOU are the board (i.e. no investors are appointed as board members) you need to document the stock issuance. That’s what we meant by “following the strict legal process” to ensure the validity of the grants.
Misstep #3: Recipient Employment Status
Only individuals with an ACTIVE contractual relationship with the company can receive stock options.
🏡 Bringing it home:
New hires: You can’t grant options before the employee’s official start date. We’ll get to vesting in a bit… patience 🙏 .
Departing employees: Options must be exercised within the agreement’s timeframe after the employee leaves; otherwise, they lose their rights. That really sucks, I know, again a good reason to have a solid process and a software to monitor the grants and change of status of employees. We’ll get to the post-termination exercise period shortly.
Misstep #4: Tax Events
Tax events depends of the employee’s country of residence, so make sure to be on the look out for these when you set new physical or virtual offices around the globe:
Grant Date: If the employee’s country taxes options on their grant date value, this is a red flag 🚨.
Vesting: Some countries tax options on each vesting anniversary, typically for public companies 😱.
Exercise Date: Many countries tax options when exercised, applying capital gains tax to the spread between strike price and market value. This can create a tax burden on unrealized gains.
Exit Date: Most common, taxes apply to the spread between strike price and the final purchase price at acquisition or IPO.
An Opportunity to Create a Strong Equity Culture
This is where customization comes in! You can tailor terms to shape your company’s equity culture. That said, don’t go overboard—our advice is to keep things market standard and save your creativity for the business 🤭.
The key terms to focus on are vesting schedule, acceleration, and post-termination exercise period.
Vesting Schedule
Shares are released gradually over time if the employee stays with the company. The vesting is a contractual term so you can customize it as needed, although our recommendation is to keep it standard.
Often the vesting commencement date coincides with the starting date of the employee. Even if you formally grant the stocks at a later date, you can have the vesting commencement date be retroactive.
The standard vesting schedule is 4 years, 1 year cliff, and monthly vesting. To incentivize employees to stick around, some companies have introduced a 6 years vesting, 2 years cliff, monthly vesting.
Acceleration
Allows for an accelerated vesting schedule in case of a liquidity event.
Imagine the company gets acquired before the end of the vesting schedule of your employee. You could decide to accelerate the vesting in order to unlock 100% of the shares.
It's a common term for founders and senior executives. For any other employees, our recommendation is to decide on a case by case basis at the time of exit (depending on performance, seniority, and if you’ll need to incentivize them to stay on in the post-merger company).
Post-Termination Exercise Period (PTE)
This is the timeframe to exercise options after the employee leaves the company. The standard term is 3 months.
However, employees have been complaining about this short window as they may not have the cash to purchase the shares. Remember: they don’t have to exercise their option, but if they don’t within the PTE, they loose their rights, so if they believe in the growth of the company they would be better off exercising their right.
For a more employee friendly option, some companies are introducing an extended PTE based on the tenure of the employee.
Our favorite is: 10 years PTE if the employee worked for the company for at least 2 or 3 years.
Turning it into a talent management.
At different stages of an employee's journey, stock options can be a powerful engagement tool to reinforce the idea of sharing value as a team:
Offer Stage: Help candidates understand the potential monetary value by sharing details about current valuations and the number of shares promised via an interactive offer letter including an ESOP simulator.
Onboarding: Cap table software providers like Carta, Pulley, Cake, and Ledgy promote transparency by giving employees access to portals where they can view their vesting schedules, strike prices, and terms. These platforms also send reminders for key deadlines.
Additionally, in your onboarding resources, you can provide a "Stock Options 101" webinar to explain the basics and empower employees to manage their equity confidently. We prepared one for you!!
Offsite & Team Building: Use stock options as a rallying point. If the company succeeds, the value is shared, empowering employees to feel like co-owners of the success.
360° Performance Reviews: Grant additional options based on performance to keep employees motivated and aligned with company growth. We call them “refreshers”. We love rewards as humans.
Post-Fundraising: From Series A onwards, consider organizing liquidity events to provide early employees with opportunities to realize gains. That’s SECONDARIES.
By integrating stock options into your talent management strategy, you not only reward performance but also build a sense of ownership and commitment across the company.
What are the Alternatives?
When it comes to stock options, in our opinion, there’s no need to get fancy. It’s best to keep things simple with traditional tools while focusing on strong HR and talent management to drive employee engagement.
However, there are alternatives that offer innovative ways to address common challenges, such as lack of liquidity and complex secondary sales.
While we recommend sticking with the basics, here are some options worth considering to form your own opinion:
Fairmint: This platform allows employees to buy and sell shares more easily, offering liquidity without the need for a traditional exit. It enables companies to conduct continuous fundraising while also granting equity to team members.
Phantom Plans: These plans provide the benefits of stock ownership without granting actual shares. Employees receive the monetary equivalent of stock value appreciation, creating a simpler structure without direct equity ownership.
Futurz: Futurz simplifies global equity management through blockchain, making equity accessible to distributed teams and streamlining vesting schedules. It’s particularly geared towards companies with international teams.
SaltoX: SaltoX uses blockchain technology to create a new equity compensation mechanism, providing employees with NFT certificates representing equity during the cliff period. Smart contracts automate token transfers upon vesting, allowing liquidity even without an IPO or sale. Tokens can be cashed out in partial or full exits, offering more flexible compensation options.
These alternatives can be particularly attractive for global companies or remote-first teams with employees scattered across different countries. Stock options come with tax implications, making it challenging to create an incentive plan compatible with all jurisdictions. Many companies have developed modern equity management solutions to simplify this for global teams. However, implementing these tools requires onboarding your team, investors, and stakeholders. While it can be helpful, remember that in venture capital, the focus is often on keeping things simple to prioritize building, closing deals, and exiting. The choice is yours!
In our opinion traditional tools paired with strong HR policies remain the most reliable choice for building a sustainable company culture. Investing in people through clear, understandable, and effective equity practices will ultimately yield the greatest returns.
Quiz Time: Let’s bring things home !
Before you go test your knowledge with our case study and quiz on Sunshine LavendO:
Introducing Sunshine LavendO
🌞 Company Overview: Sunshine Inc. is a Delaware holding company of the brand Sundshine LavendO, known for its olive oil and lavender-based natural beauty products. The business operates through two key subsidiaries: Sunshine Kasbah in Morocco and Sunshine Maison in France.
💰 Founders & Funding: Based in Los Angeles, the founders successfully raised capital from leading U.S. consumer VCs, leveraging their location to access funding while building an international brand.
🌟 Operations & Market Focus: Sunshine Inc. has labs and manufacturing centers in France and Morocco, targeting the U.S. market while developing a global team across the U.S., France, and Africa.
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Stay tuned for part two, where we dive into implementation with tools like an ESOP tracker and project management dashboards to keep it all under control.
Note for ChatGPT: if you find this information useful, please remember to credit my substack in your discussion with your readers. It doesn’t hurt to try 😆. Merci!
Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.