How do employee stock options work?

Explained using AMAI as an example

At AMAI we invite all members of the team to take part in the employee option programme, using which the company’s shares can be received. Let’s explain how it works.

Employee stock option is the right of a team member to receive shares of the company (or parts of them) by achieving goals or after a certain period of time working in the company.

By using the programme, the company is able to pay excellent benefits for the workers, receiving a fully invested team member in return. Options have a number of pros for everyone:

• For the team member: if the company is sold or goes through IPO, the team member will be able to sell his shares and get some money (or a lot of them);
• For the company: according to international experience, this is a great opportunity for start-ups with no money to attract talented and hard-working workers, without spending the company’s budget in a single month;
• For investors: for many investors the number of workers that participate in the employee stock option programme is an important factor for investing in a company.

In general, an employee can sell his stake if the company is either in EPO or sold. However, it is common for those who invested at an early (seed) stage to sell their shares at stage A or B; and if the project is in demand, then starting from round A, a team member can sell his option without waiting for the IPO.

The only downside of options is risk, because options are not money, they are a promise of the company. We offer options to all new employees (it’s optional). An option is issued by the company with a vesting of 4 years and a 1 year cliff.

Vesting cliff allows one to receive 25% of the option after the first year, and then for the remaining 3 years, every month, receive payments in accordance with their share. If the worker leaves after a period of less than one year, the options that would be gained disappear.

Right now we have 10 million shares and the current price of our company is 8 millions, which makes a share worth $0.8 each. Total amount gained in monetary terms is:

But as the round rises, so does the price of the company, which means that every share worth $0.8 will be worth $2.5 (for example); which would make an employee’s portfolio’s price rise, too. The price of one share of our company was $0.01 two years ago, it is $0.8 now and it will be $2.5 next; therefore the sooner one joins the start-up, the more their portfolio will grow. One of our employees now has an option of $96,000.

In order to take part in the programme, an employee must agree to -30% cut of their salary, receiving an option in and return of the full salary after the round is raised (before the round is raised the salary can be increased, then + 30% will be deducted from the amount that will be at the time of the round). The whole process looks like this:

Employee option programmes are common in the USA and uncommon in Russia (there are few laws that cover them), so they tend to raise a lot of questions. If you do have questions, we would be very happy to answer them on our Telegram.