How And Why We’re Rewriting the Rules of Employee Equity Compensation
Feb 14, 2022 | Business
At Bolt, we recently did something radical. We rolled out the most employee-friendly options program possible.
Big VCs hate this. Employees love it. And I believe we’re the first tech company to ever do it this way.
Let’s dive in on the how, what, and why of this program and our goals with it.
Traditionally, employee options work like this: Employees get an option to purchase X stock at $Y price. After they depart the company, they have 3 months to come up with enough cash to “exercise the option.”
It sounds like a good deal, except that the system is frequently predatory toward employees. Why? 1) Employees might not be able to come up with the cash to exercise, thus losing all their stock. 2) Only after it’s exercised does the capital gains clock begin, meaning employees have to wait at least a year to get capital gains tax benefits. So you could either end up losing stock or getting stuck with a big tax bill.
Some companies have extended the exercise window to several years (though shockingly many of the big tech companies have stopped for some reason.) This is a good step—but not good enough.
We extended the exercise window at Bolt too, but then we’ve taken it two steps further. We did this based on two open secrets about equity.
Secret 1: Key executives typically have a special arrangement with the company that few know about. They get early exercise meaning they are able to exercise their stock before it vests. This means starting the capital gains clock—a huge advantage and far better than paying ordinary income tax.
Secret 2: Sometimes the company gives these executives loans to exercise their options. This means that the executives don’t have to come up with the cash today. They pay nothing out of pocket—nothing. And they can repay the loan years later when the stock may have appreciated if they stay at the company.
So we asked the question: Why not do this for all employees and not just a favored few? Here were the initial answers I got:
- It’s never been done before!!!
- It’s a lot of overhead and paperwork to do it right…
- Are you sure you want to do something this good for employees?
- Never been done before? That’s a feature, not a drawback!
- I’ll pay for any amount of overhead if there are benefits to my employees.
- Um, of course we do.
Thankfully at Bolt we have a forward-thinking Board and a forward-thinking legal team. Both are critical to pulling this off, and they rallied behind this concept and went to work.
Some notes on the mechanics:
- There IS risk to the employee if the stock goes down afterwards—they now have a real loan outstanding and personal exposure, not just limited to their stock.
- Therefore, we made sure to give every employee ample time to read about the pros and cons of this decision, including learning about all the risks in the business, and we gave every employee a $300 stipend to consult a financial advisor.
- Implementing the program for employees that already had options had to be done as a formal tender offer to comply with securities laws, because some employees had to opt in to amend existing option grants.
- After the initial implementation, we now offer every employee early-exercise and an exercise loan from the start on a go-forward basis.
- Every employee now has the same privileges as the founder and executives at a company.
- Our team could not have been more grateful and excited.
- More than half of the Bolters who were eligible to receive this benefit decided to move forward with both early exercise and loans.
- Even if they decided not to utilize the benefit, everyone was eligible to receive long-term exercise windows.
I strongly recommend that more companies do this. It has some overhead but here’s the kicker: Because the loans go towards paying the company for its stock, the loans are cashless. It costs the company nothing!
Employees take some risk, but the earlier in the company’s life cycle you do this, the better it is. (If you are a Seed thru Series B company, this is a no-brainer.) At Bolt, we did it as a Series D company. If your company has a strong growth trajectory, the benefits to your team from this program can be extraordinary.
Where did this concept and the scaffolding around it come from? At Bolt, we think fearlessly and put people first. This has driven Conscious Culture (conscious.org), 4-day workweek (fourdayweek.com), and so many other first-of-its-kind programs. This maxed out employee options program is just another example.
We care more about our employees than anything else at the company. When you *care enough*, you are willing to ask *tough questions*. At Bolt, we’re always committed to asking ourselves the tough questions. Especially when it comes to our people.
Alright, that’s all for now! I truly believe and hope that this becomes the DEFAULT for any company that leverages stock options. The Old-School Mob VCs won’t like it, but it’s incumbent on founders and forward-thinking VCs to stand up and do what’s right.