Many, many hours of thought go into finding a good candidate and negotiating what salary and stock options go into their offer letter. Additional effort goes into making sure the new employee is enrolled in payroll so they can get the salary they were promised in the offer letter. But sometimes the effort falls short when it comes to granting them the shares they were promised.
Oftentimes figuring out how to grant the shares stated in the offer letter is a bit of a mystery. But it need not be a black box anymore! Read on for an explanation of how it happens.
The Board Has to Say It’s Okay
Before the company can give any shares to anyone, its board has to say it’s okay to grant these shares. There must be a formal “board approval.” This can be done at a board meeting and then captured in the board meeting minutes, or more commonly, through a board consent. A board consent is just a document saying roughly, “the board is okay with you giving this person this many shares under the terms of the grant.” The entire board signs it.
The Company Creates and Signs the Option Agreement
The option grant can be an NQO or an ISO (learn more about different types of grants in “3 Questions about Equity Alphabet Soup—Answered”), but let’s say for the sake of this example it’s an ISO. The company will create an ISO agreement stating that an employee gets an option to buy x number of shares on y date for z price per share. The president of the company will then sign this agreement.
The Employee Signs the Option Agreement
Next, it’s the employee’s turn to sign. When the employee signs the ISO agreement, they are accepting the option grant. They are acknowledging that they have an ISO and agreeing to the terms of the grant. They are NOT taking action to exercise it, i.e., actually buying the shares. That’s the next step.
The Employee Exercises the Option
This next part—exercising—often happens years later, when the employee is leaving the company, or perhaps even not at all. The circumstances of when an employee can exercise the option depends on the terms of the grant, i.e., must the shares have vested? Is early exercise allowed? Regardless when the employee decides they want to actually buy the shares, then they pay money for them, sign an exercise document, and get a stock certificate in return from the company proving their ownership. Before the exercise, they have the OPTION to buy shares. After the exercise, they actually own shares and are officially a stockholder.
Once they are a stockholder, company’s cap table must be updated to reflect that they no longer have options, but shares now instead.
Making It Easy
These basic principles are the same whether you’re granting shares on paper like it’s 1920, or granting shares using software. However, solutions that help you automate it and make it less of a manual process do differ slightly from the traditional paper process.
The most striking difference is the efficiency that comes with automating tasks instead of having real people complete them. As an example, software like Shoobx automatically generates stock certificates, updates the stock ledger, fills out the data room with the new documents, and updates the cap table (without you having to take out a calculator or think about it!). All four actions I just listed happen in a fraction of a second, at the same time, with no human effort required. Using traditional PDF or Word document methods, a person would have to do all of those tasks.
As an added bonus, no paperwork gets lost or is left incomplete with automation, since software (unlike a Word or PDF document), doesn’t let employees “go off the rails” and cross important terms out, leave crucial fields blank, or modify the document in ways the employer wouldn’t want them too. Everyone wins with automation!