Options: What your board members want to know and how not to keep employees waiting for options
Option grants are usually a non-issue at the typical board meeting. During the financial presentation the CFO flashes a slide with the following information:
- Size of the option pool
- Number of options that have been granted
- Number of options remaining and available for future grant
- Names of employees and numbers of options proposed to be granted at the particular meeting, if any
- Exercise price
The directors often have a couple of questions about who is getting how many and why and whether the remaining options will be sufficient for planned hires etc. After a brief discussion, the grants are approved. Good housekeeping suggests that there be a brief presentation of the status of the option plan at each board meeting whether or not you are asking for specific grants – just to keep the board current.
BTW: after the approval, the CFO typically completes the actual option grant forms, they are then signed by the CEO (sometimes the CFO) and distributed to the employees.
Sounds simple, until you don’t do it, and you want to ask for approval of option grants.
If you don’t do it (and by “it” I mean prepare a slide with all the relevant information) regularly (and by “regularly”, I mean at each board meeting), an alert board member is likely to be annoyed and have a lot of questions, when you do ask for approval of grants. While it may seem like a small amount of information to convey and absorb to you, this is likely to be because you have thought about it in connection with determining what grants to ask for. To your board member it is likely a matter of first (or at least not recent) impression. No matter how much you try to explain it, the director is likely to ask for better information, time to consider and then decide to take it up at the next meeting.
You, of course, will be embarrassed because you will have promised grants to various people and will then have to explain that they won’t get the grants until the next board meeting.
Before you get steamed at the board member, here are a few things that are likely to be running through his or her mind (remember they are not on top of the facts because you have not been reminding them regularly):
- What percentage of the fully diluted is the pool?
- Has the percentage of the fully diluted represented by the pool changed due to recent issuances?
- What is the exercise price?
- Do we need a 409(A) valuation? Do we need an update of our old 409(A) valuation?
- How much of the option pool has been used up?
- What planned hires do we have, and how many options will we need for them?
- Will we have to increase the pool, and how much will that dilute the investors?
- Is there acceleration on an exit?
- Is there a double trigger?
- Why am I being put in the position of being the bad guy and delaying grants to employees when the CFO should have a slide with all this in the board package?
These and other questions are likely to come at you rapid fire. No matter how crisp your answers, at some point your director is going to say something along the lines of “I am not prepared to decide on this now, let’s put it over to our next meeting.”
Once those words are spoken, the likelihood of anyone saying, “nope, we have to decide now…” is vanishingly small. Furthermore, can you imagine a director’s reaction if you said that?
So, guess what, your employees are going to be waiting until the next board meeting.