Giving stock options to employees

Founders usually treat the option pool like gold, as they should. Options represent the stock of a company and if you think that stock has real value, generally the thinking is you shouldn’t hand it out like candy. An article in Business Insider highlighted one CEO that bucked that trend: the CEO and founder of Chobani makes sure “that every full-time employee of the yogurt company would receive an ownership stake. That portion, now owned by about 2,000 employees, could be worth up to 10% of the company.” The CEO/founder has taken a different approach to options and it’s not the first time we’ve seen the method employed successfully.

Recently we looked at a successful startup with 50+ employees whereby every employee had options with a 4 year vest and 1 year cliff. Not including founders, the ownership for each employee ranged from 0.01% to 0.91% with an average of 0.10% and median of 0.02%. In total, the 50+ employees own ~7% of the business. Aside from making the cap table much larger (which doesn’t matter), what were the other effects?

The company’s employees are incredibly loyal. Even at positions where turnover is expected to be greatest, employee retention is phenomenal in part because they own equity.

The company’s employees are productive. The employees want to work hard in part because they own upside. As a result, revenue/employee is high and the business was able to reach profitability on very little capital relative to peers.

Employees work for below market salaries. Because they love where they work and feel like they have upside, even though the company is located in a high cost city, employees are working for below market wages. In their view, the equity ownership is part of their compensation, so they’re willing to take lower salaries. As a result, the company has been able to conserve cash.

Employees that don’t stick around lose options. Because these options have a standard 1 year cliff and 4 year monthly vest, the employees only keep the options if they meet those retention criteria. If you’re unfamiliar, a 1 year cliff means that an employee must stay at the company at least 1 year from the option grant date in order for the first 25% of options granted to become theirs. If the employee leaves on day 364, they get nothing. The 4 year monthly vest thereafter means that the employee will earn the remaining 75% from day 366 through the 4th year on a monthly basis. Each month through the 4th year, 1/48th of that employees’ options will vest. Employees that leave before the vesting period ends forfeit any unvested stock back to the option pool.

The article on Chobani goes on to state that it’s a private company “estimated to be worth $3 billion to $5 billion two years ago. When it sells or goes public, the average employee could receive a payout of about $150,000. Because the shares granted vary based on tenure at the company, some employees could receive as much as $1 million.” The paragraph shows granting options to every employee can be expensive if you’re successful, but then again, if you’re successful, it really doesn’t matter that you gave up some upside especially if your employees helped you get there.

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Written by

co-founder at Blossom Street Ventures

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