The pitfalls of share options in the technology startup

Draft 1


PLEASE NOTE: I  am a simple engineer and this document should not be taken as legal advice in any way whatsoever. 


Please feel free to comment or relate your stories here. All feedback is more than welcome

Over the last few weeks I have been involved in trying to get a fair outcome for some options that I have in one of the many startups I have worked with over the years. As I continue to push my case forward I thought I would write some thoughts whilst fresh in my mind. 

Many of us are attracted to startups due to the promise of shares or share options in the company we are joining. Many people work at reduced rates or no pay in exchange for these contracts, with the hope that one day they will materialise into some value for us.

For startup companies, options are a vital currency. Initially cash is tight and using options is a means to attract the right people to help launch the company or take it to the next stage in it's evolution. 

In recent weeks, I have received many messages of support in my endeavours, but worryingly many former classmates, colleges and other technologists have written to me with the most amazing tales of woes. Some of the stories are almost unbelievable, it seems as if the institution of "options" is more than broken and I will be campaigning in the future for this to change. 

LESSON 1 : Not all option agreements are equal

I have recently learnt the hard way that there are many pitfalls in the option agreement which must be taken into account. Some founders are genuine and want those that helped form the company to benefit, if it has success. Some start out that way, but become greedy along the way, and yet other are sly and devious and know from the outset that they do not intend to pay. The founders sentiment will be reflected in the option contract. 

Whilst it may seem that you can use your judgement or a Lawyer friend to check through the contract, I would strongly advise that you seek an expert in the field. There are MANY pitfalls with option contracts and you want to make sure that someone with expertise in this particular area thoroughly reviews your option agreement. 

Below are some (not all important points to consider), this based on my recent experiences. 

LESSON 2 : Notification

Do make sure that the company is required to notify of a "Trigger Event" in good time before the event. If not you will be in a situation where a transaction is going ahead without your knowledge, and there is little you can do about it, if you don't know about it. 

LESSON 3 : What is a Trigger Event ?

Make sure the contract clearly states what constitutes an event and under what conditions you will be able to participate in the transaction. Companies structure all kinds of transactions in convoluted ways, you want to ensure that you are able to participate irrespective. 

LESSON 4 : Directors discretion 

Leaving things at the discretion of anyone in a contract is good for the company and not so good for you. As much as possible you do not want to leave things to the discretion of the directors,  if they are not sympathetic to you the outcome for you is unlikely to be a good one. 

LESSON 5 : Leaving employment


Make sure that it is clear what will happen when you leave your employment, make sure when you leave  you explicitly obtain confirmation of the number of vested options that you have. Also check the clauses that relate to the expiry of these vested shares.  Many contracts will have a fixed time limit, some might try and put other clauses in that restrict you once you leave employment. 

Further lessons

Option holders are not shareholders, in some companies they will be treated with a great deal of respect and will be informed and be kept up-to-date with developments in the company, however, in others they will be not. The company does not have a legal responsibility to update option holders as they do for shareholders. It is worthwhile maintaining good relations with former colleges and shareholders, who may be sympathetic to you should things go wrong.  As an option holder, if you have a bad contract and have no relationship with the company you hold the options in, you may be in the dark and left out to dry. It is important to ensure your rights within the contract, but also maintain relationships. 

If things do go wrong


You want to make sure that you 

  • Inform all the directors of your situation, some may not be aware of the details. 
  • Inform the buyers, if a deal is going ahead - again they may not be aware 
  • Inform the shareholders
  • Any other stakeholders you can think of (without opening yourself up to liable claims). 
When you contact anyone, stick to the facts ! Option contracts are a contract between an individual and a company. It has nothing to do with the amount of work or the quality of work, when things go wrong treat it unemotionally as a contract, an agreement, a promise. The circumstances surrounding that agreement are less important than the agreement itself.

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