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Balderton Essentials
Guide to Employee Equity
Balderton Capital 2017. All rights reserved
What Do We Address Here?
Why give equity to employees?
What is employee equity?
How much equity is needed for the ESOP pool and how does it evolve?
How much equity should I give an employee?
How do I set a strike price for employee options?
How do I help employees understand and value their equity?
What are the details of vesting, exercise, and refresh?
What are variations on stock options?
How do I present this to my board?
Where can I find more information?
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Why Give Equity to Employees?
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Why is Employee Equity Important?
Equity is important for
Compensation, especially in early days when cash is scarce
Recruiting rockstars (and everyone else!)
Retention and continued enthusiasm from the team
Incentivising future successes
Rewarding past performance
Culture and engendering a sense of collectiveness
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What is Employee Equity?
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Common Types of Equity for Employees
Options (ESOs)
Most commonly used in:

Offer the holder the right (but not the obligation) to buy
company shares at a predetermined price over a specific
timeframe

Virtual shares (VSPs)

Most commonly used in:

Also known as 'Phantom Shares' or 'Shadow Stock'
Provide a contractual right to the employee that mimics an ESO
without the real option

Like ESOs, granted at a predetermined price, and upon exit
(when the shareholder sells the real shares), the employee is
treated as if he or she had sold the real shares

Unlike ESOs, do not provide employees with voting rights or
the other rights of traditional shareholders upon exercise

Warrants
Used in:
Like ESOs, offer the holder the right to buy company shares at
a predetermined price over a specific timeframe in the future.
In specific jurisdictions, warrants have more favourable tax
treatment than ESOs

'BSPCE' warrants are considered most tax-efficient type
in France

In some jurisdictions, such as Sweden, warrants and other
types of equity are much more complex (e.g. employees may
have to pay a 'premium' upfront) and tax advantages seen in
other jurisdictions may not apply
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}Key Events in the Life of an Option
Vesting Period
Time over which options become
exercisable by employee
Cliff
Employee earns right
to exercise first portion
of granted options
Grant
Employee
receives promise
of future option
Exercise
Employee exercises option to purchase shares
at the strike price. May occur any time after
vesting. If an employee leaves the company be-
fore an exit, he or she is often required to exer-
cise any vested options within a specified win-
dow (i.e. 90 days).
This may be very short, as when an employee
works for the company at the time of an exit
and exercises and sells on the same day.
Alternatively, this may also be long due to tax
reasons, as when an employee exercises at a
low strike price and intends to hold the options
so that the gain from sale is taxed as long-term
capital gains.
}Sale
Fully Vested
Employee has earned right
to exercise all options
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Other Key Terms in Equity
Employee Stock Option Plan: A programme that sets out the terms of employee equity
Employee option pool: The percentage of a company's total shares outstanding set
aside to be offered to employees as a tool for recruitment and / or retention
Strike price: Also known as an exercise price. The price (determined at the time of grant)
at which an employee can purchase the shares of the grant
Exercise window: The timeframe over which an employee may purchase options. This
window typically begins on the date of departure from a company and ends after a pre-
determined number of days
Refresh: A grant given to an employee after his or her initial hire
Types: For additional equity types / structures, especially for other countries or
jurisdictions, see Section VIII
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How Much Equity is Needed for the
ESOP Pool and How Does it Evolve?
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How Big Should an ESOP Pool Be?
Note: Founder shares are separate from the ESOP pool and should not be included here
The size of the pool should be reviewed annually in conjunction with hiring plansfinancing rounds also
offer good opportunities for this
Typically, after any financing round through Series B, a company should aim to have an unallocated
pool of ~7.5%. After Series C, the unallocated pool should represent roughly 5%
It is crucial to remember that while employee equity pools can be expanded over the company's
financing journey, the pool should not expand infinitely. For example, once a company becomes
public, other incentive programmes (like LTIPs) may be more appropriate.
How much am I setting aside for my employees in aggregate?
This is an important decision made in conjunction with your investors and with your board.
We recommend growing your ESOP pool size to approximately match the below:
Seed Series A
Series B
Series C
Thereafter
Size of employee pool as %
of total equity (allocated +
unallocated)
7.5 10%
9 12%
12 15%
15%+
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How does the pool evolve?
Illustrative Example* of ESOP Evolution
*Note: companies should be evaluated on a case-by-case basis. Example is illustrative.
Pre-ESOP
Seed
Series A
Series B
Series C
Series D
IPO
Company
Valuation
$3M
$25M
$75M
$200M
$450M
$750M
Total Shares in
Company
10M
12.5M
15M
20M
25M
30M
40M
ESOP Total
1.9%
7.5%
10.0%
11.0%
13.5%
15.0%
18.0%
Allocated
1.9%
3.1%
5.9%
7.1%
9.0%
11.7%
15.0%
Unallocated
4.4%
4.1%
3.9%
4.5%
2.9%
3.0%
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How does the pool evolve?
Illustrative Example ESOP Pool Growth & Vesting
Cumulative. *Assumes all allocated shares vest
5%
0%
0
1
2
3
4
5
6
7
8
9
10
9%
14%
18%
% of total shares in ESOP
Seed
A
B
C
D
YEAR
% of total shares allocated
% of total shares vested*
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How Much Equity Should I
Give an Employee?
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How Do Grants Change Over Time?
It's okay for grants to start off as more art than science, but it will
always require a balance between the two
Grants to early
employees
Early on, equity helps to attract and incentivize
team members who are vital to the initial
success of the company (engineering, product
development, etc.)
These grants vary in size, according to the
candidate and resources.
By Series B, most grants should be systematic
and fairly transparent, within an employee stock
option plan.
Recruiting the C-level management team will still
likely require tailored grants.
Key management hires
ESOP
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Should All Employees Get Equity?
Giving equity to all employees can be a powerful cultural tool. While this has many
advantages, it's important to be thoughtful in granting options
Giving options to all employees helps ensure everyone feels a part of the vision and a
sense of ownership within the companywhich can be an incredibly powerful motivator
Even junior employees? Yes, grants can be relatively small for junior employees
Equity is not a limitless resource. However you allocate it, ensure you have enough to
compensate rockstars and leaders
Founders may find that employees, especially in Europe, may not value equity as highly
as a cash equivalent. In such cases, small equity grants or cash awards can be suitable
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Planning the Size of Employee Grants
Plan with a view on both the top-down and bottom-up!
What is the value of this person to us and what is a
competitive offer?
How much equity is available in the employee option pool?
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What are the Steps of Planning Grants?
To plan equity for near-term hires:
1 Create a hiring plan for the next ~18 months

2 Estimate how much equity you anticipate needing for each new hire
a Start planning with senior hires, as their grants will likely be the largest
b Include a buffer for negotiation!
3 Before Series B: Determine appropriate grant size based on:
a Amount of employee option pool
b Role / experience of the individual, and

c Market / competitor offers
or
1 Series B+: Confirm grant size and total equity needed based on ESOP scheme

a Include a buffer for exceptions
2 Identify existing employees to be awarded refresh or reward grants
3 Consider how these grants inform future expectations
4 Update ESOP scheme as appropriate
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How do ESOP Grant Sizes Differ
by Stage?

# of Employees
< 15
15 50
50 +
Typical cash compensation
Minimal
Below market
Close to market
Corresponding Equity
Up to 1% per employee
(typical in U.S. startups)
By seniority
Based on ESOP scheme
(typically multiple of salary)
Bottom Line
Be generous!
Move away from
individual grants
Stick to the scheme!
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What are Typical Grants for
Early Employees?
Grant size for early (first 1-10) employees is determined by role and
experience, but should reflect the early stage at which they joined
In the U.S., the earliest few hires might expect up to 1% each. Expectations
are somewhat lower in Europe, but this is adjusting upward
Incentivizing your first 10 employees via equity is more art than science.
It's helpful at this stage to step back and think about how much you want
allocated by your seed round, and to set compensation expectations for your
early hires based on realistic and ambitious upside potential
You can find a more detailed tool in planning for an individual grants here.
You can find further reading about grant sizes and benchmarks here.
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By Series B and beyond, a structured ESOP scheme should determine grant size by
applying a multiple to the employee's base salary

Levels can be used to coordinate grant sizes as a proportion of base salary across roles
and functions
As company valuation grows, upside falls and you may have to offer multiples at the
higher end of the ranges in the table below

In places where salaries are lower, multiples may also be higher
You can find a more detailed tool in planning for an
individual grants here.
You can find further reading about grant sizes and
benchmarks here.
What are Typical Grants at
Different Levels?
Role
Level
Salary Mult.
C-Level
1
See next slide
VP
2
0.7x 2.0x
Director
3
0.5x 1.0x
Manager
4
0.3x 0.7x
Key Functions*
5
0.2x 0.5x
All Others
5+
0.0x 0.2x
For example, If a Manager earns a salary of 80,000, his
grant could be 0.5 x 80,000 = 40,000. The number of
shares in the grant is determined by the delta between the
most recent valuation and strike price of the options
*Key Functions might include strong individual contributors (tech or otherwise) that will have
to be incentivized proportional to the value they bring the business
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What are Typical Grants for C-Level?
European Executive Equity Stakes By role
Management team hires will likely expect to negotiate larger grants, regardless of stage

These grants will remain highly individualized

It is rarely necessary to give even critical senior hires more than 1-2% (with the exception of
CEO hires). Think carefully, and discuss with your board, before you make an initial grant of
more than 1%

At later stages, you should also examine the size of this grant relative to the individual's salary
Source: 2015 VC ECS survey, reflects non-founders only
0.0%
2.5%
CMO
CTO
COO
CFO
Other C-Level
25th Percentile UK & EU
75th Percentile UK & EU
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This hypothetical case study is meant to help illustrate the planning process that a
company may go through for early employee grants

'Pied Piper' was founded three years ago by two co-founders

'Pied Piper' first hired a talented and experienced engineer, and offered him 1% of the
company as part of his compensation. He was essential in the company's early days and
is still with the company today

Another great engineer joined shortly thereafter, and was also offered a similar grant

The early grants for the whole team can be seen in the table below
Case Study: 'Pied Piper'
Original Team & Grants
# shares % of company
Total company
12,500,000
100.0%
Target ESOP
937,500
7.50%
Original Team & Grants
# shares % of company
ESOP
Allocated
Engineer 1 (first hire)
125,000
1.00%
Engineer 2 (second hire)
112,500
0.90%
Product 1
87,500
0.70%
Total ESOP
325,000
2.60%
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'Pied Piper' is now post-Series A. The co-founders
have established an ESOP, and the pool represents 9%
of all outstanding equity (allocated and unallocated)

The current team allocations can be seen in the
table below
Case Study: 'Pied Piper'
Post-Series A
# shares % of company
Total company
15,000,000
100.0%
Target ESOP
1,500,000
10,00%
Post-Series A
# shares % of company
ESOP
Allocated
Engineer 1 (first hire)
125,000
0.83%
Engineer 2 (second hire)
112,500
0.75%
Engineer 3
15,000
0.10%
Engineer 4
15,000
0.10%
Product 1
87,500
0.58%
Sales /Biz Dev 1
3,000
0.02%
Sales / Big Dev 2
3,000
0.02%
Marketing Mgr 1
4,000
0.03%
Unallocated
1,135,000
7.57%
Total ESOP
1,500,000
10.00%
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Case Study: 'Pied Piper'

The co-founders have decided to continue giving grants to all employees going forward

There are key hires to be made over the next 18 months, including:

COO, who will also act as Head of Sales; VP of Marketing; and VP of Finance

The founders' plan anticipates the following grants :
This is a refresh grant
for the first Engineer
Post-Series A
# shares
% of company
Total company
15,000,000
2100.00%
Target ESOP
1,500,000
1-120101-1-1-10%
ESOP
Allocated Existing
Engineer 1 (first hire)
125,000
0.83%
Engineer 2 (second hire)
112,500
0.75%
Engineer 3
15,000
0.10%
Engineer 4
15,000
0.10%
Product 1
87,500
0.58%
Sales /Biz Dev 1
3,000
0.02%
Sales / Big Dev 2
3,000
0.02%
Marketing Mgr 1
4,000
0.03%
Allocated New
COO / Head of Sales
300,000
2.00%
VP Finance
75,000
0.50%
VP Marketing
60,000
0.40%
Engineer 5
22,500
0.15%
Engineer 6
22,500
0.15%
Product 2
6,000
0.04%
Sales / Biz Dev 3
1,500
0.01%
Sales / Biz Dev 4
1,500
0.01%
Allocated Refreshes
Engineer 1
18,750
0.13%
Unallocated
627,250
4.18%
Total ESOP
1,500,000
10.00%
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How do I Set a Strike Price for
Employee Options?
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What Strike Price Should Options Have?
The strike price of employee options generally increases over time, both in absolute terms and as a percentage of
the corresponding price paid by investors.
Why?

Taxes are typically optimised for both the company and employee by keeping the strike price as low as
possible during the earliest stages of the company

Lower strike prices for early employees helps to appropriately incentivize them

Be sure to discuss all tax implications with your tax expert!
Pre-seed and at seed, strike price
is typically very low in absolute
terms and vs that paid by investors
Employee Strike Price vs Share Price of Latest Round
By Series C, the discount
for employee strike price is
significantly reduced
If the company IPOs, employee
options are priced the same as the
market price
Time
100%
80%
60%
40%
20%
0%
Strike price stays very low
vs. the price paid by
investors through
Series A
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Why are Employee Options Priced
Differently than Those of Investors?
Fair Market Value
A company will often determine the appropriate exercise price for
options based on the fair market value (generally lower than the valuation
agreed upon by VCs and other investors) to ensure favourable tax
treatment on exercise
*Important note: If the exercise price for options is set lower than the
appropriate fair market value, employees may face tax consequences
at exercise.
In some jurisdictions, this process is required of companies of a certain
size or stage, and often must be completed or validated by a third party

UK: HMRC Shares and Assets Valuations (SAV) offers some flexibility
in pricing

US: 409A valuation
*Important note: Balderton is not, and does not claim to be, qualified to
provide the fair market value of a company or to set corresponding strike
prices for employee options. Please ensure you seek advice from qualified
financial, legal, and tax advisors to understand the requirements and
nuances of this process in your jurisdiction(s).
$6
$0.90
Why is there a difference
in price?

Investors typically receive
'preferred' shares, which have
special rights and privileges
that the common shares
gained from employee options
don't have (such as liquidation
preferences).

To compensate common
shareholders for this difference,
the exercise price is set at
a discount of as much as
70-90% at Series A & B
Price paid by VCs in latest funding round
7
5
4
2
-0
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When Should I consider a Stock Split?
The number of shares in the company impacts the value of each share, and
thus the strike price for employee options:

If the company is valued at $10M and there are 1,000 total shares outstanding,
each has a value of $10,000, whereas if there are 10M total shares outstanding,
each has a value of $1

If employee options are priced at an 85% discount to the investor value, the strike
price the of each of the higher-valued options is $1,500, where the strike price of
each of the 10M shares is $0.15
Through Series B, you should aim to keep the share price no higher than $1-$2.
We find that employees respond more favourably to grant offers that reflect a
greater number of options at a lower strike price both because this enables them
to potentially exercise smaller portions of their grant at different times, and because it
emotionally 'feels' like a more significant grant with a greater number of options
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How do I help employees understand
and value their equity?
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How do I Communicate the
Size of a Grant?
% of company
Number of shares
Monetary value
(,$,)
There are a few ways to articulate the size of an equity grant. In different contexts, it's
useful to know how to communicate that value in alternative ways.

Often used in framing grants to first handful of employees and management team
(or experienced) hires

Caution: don't anchor most employees to a % ownership, as this will change over
time due to dilution

We recommend using this as the fundamental way to think about and
communicate all grants

Illustrates what the shares are worth today

Facilitates a discussion around the potential upside for the employee if the
company achieves an exit Sell the dream, but with realistic expectations!
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How do I Express the Value of a Grant
to Experienced or C-level Hires?
Key management team members and experienced hires will often think about grants in terms of % of the company.
It's important to be prepared to communicate their grants as such
You should:

1.
Know the number of fully diluted shares outstanding for the company

2.
Articulate the grant in terms of % of company and number of shares


i.e. If the company has 10M shares outstanding, and you grant a COO 2% at hiring, the grant is 200,000 shares

3.
Present what the value of the grant today by using the employee's strike price and most recent company valuation by investors i.e.


If the COO's strike price is $0.15 but the most recent fundraising with investors was $10M (or $1/share), the value of the options to



the COO today is 200,000 x ($1- $0.15) = $170,000

4. Communicate your vision for the company in terms of a realistic potential future valuation to illustrate the potential upside for the



employee, taking into account anticipated dilution. Dilution occurs as a result of new financing rounds or the issuance and




subsequent exercise of new options (see slide 33 for an example of dilution). i.e. If you believe the company will potentially



achieve an exit at $500M and assume 30% dilution, the potential value of the shares to the COO in the future is 200,000 x ($35 -


$0.15) = $6,970,000, representing an upside of $6.8M

5.
Know the detailed terms of the grant. It may be helpful to prepare a summary sheet that includes grant date, number of shares,



strike price, and vesting schedule for the grant for clarity. Do not include percent of company or potential upside unless you've



clearly stated that these are current and potential, respectively

6. Keep any contracts or documents regarding options grants separate from employment contracts

7. Be transparent! It is essential to be clear and accurate when communicating grants to employees
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How do I Express the Value of a Grant
to General Employee Hires?
For other employees you should sell the current value of the grants, as well as potential upside
You should:

1.
Articulate the grant in terms of number of shares and monetary value, using the employee's strike price and most recent company



valuation by investors. i.e. If you grant an employee 5,000 options at a strike price of $0.15, but the most recent fundraising with



investors was $10M (or $1/share), the value of the shares to the employee today is 5,000 x ($1 - $0.15) = $4,250

2.
Communicate your vision for the company in terms of a realistic potential future valuation to illustrate the potential upside for the



employee, taking into account anticipated dilution i.e. If you believe the company will potentially achieve an exit at $500M with an



assumed 30% dilution, the potential value of the shares to the employee in the future is 5,000 x ($35 - $0.15) = $174,250

3.
Know the detailed terms of the grant. It may be helpful to prepare a summary sheet that includes grant date, number of shares,



strike price, and vesting schedule for the grant for clarity. Do not include percent of company or potential upside unless you've



clearly stated that these are current and potential, respectively

4.
Keep any contracts or documents regarding options grants separate from employment contracts

5.
Be transparent! It is essential to be clear and accurate when communicating grants to employees
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Ownership
Dilution %
Founder(s)
100%
93%
69%
50%
40%
34%
29%
71%
ESOP
8%
6%
4%
3%
3%
2%
68%
Seed investors
25%
18%
14%
12%
11%
58%
A investors
28%
22%
19%
17%
41%
B Investors
20%
17%
15%
26%
C investors
15%
13%
13%
How Does Dilution Work?

What is it? Dilution is a reduction in the relative ownership of a company for existing shareholders due to the creation of new
shares. It occurs, for example, as a result of a new financing round or the issuance and subsequent exercise of new options
Series
Founding
ESOP Creation
Seed
A
B
C
IPO
Valuation ($M)
0.25
1
3.2
25
75
200
750
Amount raised ($M)
0
0
0.8
7
15
30
100
Pre-money ($M)
0.25
1
2.4
18
60
170
650
% dilution to existing
shareholders
0.0%
7.5%
25.0%
28.0%
20.0%
15.0%
13.3%

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What's an Example of a Grant
Summary Sheet?
Sample ESOP Terms of Option Summary
Date of Grant: 1 January 2017
Vesting Commencement Date: 31 January 2017
Number of Options: 5,000
Exercise Price: $0.15
Timetable under which the Options will Vest: These Option Shares shall vest over
4 years, 25% of the total grant on the first anniversary of the Vesting Commencement
Date, and the remainder in equal instalments of 1/36 every month for the subsequent
3 years.
Exercise and expiry conditions (if relevant):
All terms subject to board approval.
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What are the Details of Vesting,
Exercise, and Refresh?
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What Vesting Schedule Should I Use?
Typical Terms
Typical Criticisms
Alternative
Schedules

Balderton recommends: 4-year vesting period, one year cliff,
monthly vesting thereafter
Why?

Follows industry standardused by most tech start-ups

Offers balance between meaningful initial grant size and incentive for employee to
stay at the company

Is understood by, and is likely consistent with, acquirers

Employees receive a chunk of equity at end of month 12, but earned it in the
preceding 12 months

4 year vesting period, one year cliff, quarterly vesting thereafter; used by Facebook

6-year vesting period, one year cliff, monthly vesting thereafter; used by AngelList

4 year vesting period, back-weighted vesting (ie. 10% / 20% / 30% / 40% in each
year); used by Snapchat
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What Does a Vesting Schedule Look
Like in Practice?
Note: See additional materials for an example of employee vesting schedules under
different terms.
Monthly Vesting Schedule
End of Month
1
2
3
12
13
14
15
24
36
47
48
Initial Grant
10,000
Monthly Vesting
-
-
-
2,500
208
208
208
208
208
208
208
Total Vested
-
-
-
2,500
2,708
2,917
3,125
5,000
7,500 9,792 10,000
% Vested
0%
0%
0%
25%
27%
29%
31%
50%
75% 98%
100%
Total Unvested
10,000
10,000
10,000
10,000
7,500
7,292
7,083
6,875
5,000
2,500
208
-
% Unvested
100%
100%
100%
100%
75%
73%
71%
69%
50%
25%
2%
0%
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Exercise Window

What is it? When an employee departs from a company, they may exercise, or purchase their vested
options at the strike price, within a specified amount of time. (Because this window does not start until
departure, employees that remain at the company are not impacted by this term.)
Typical Terms
Typical Criticisms
Alternative
Windows
Balderton recommends: 90 days after employee departure

Why?

Provides enough time for most employees to collect the liquidity to exercise their options as desired

Also provides the company with a reasonable expiry date for planning purposes, the ability to make bespoke
exceptions for retention or hiring purposes, and the ability to roll any expired options back into the pool

Increasingly, this is the industry standard

(Still) Too short:

Unduly penalizes employees for agreeing to have less liquidity due to lower salary compensation in early days

30 to 60 days: shorter; can be viewed as harsher for employee

1-10 years: seen as way to not penalize employees who have foregone liquidity in the form of reduced
compensation, especially in early days. However, long windows extend a period of uncertainty around
unexercised options, making it difficult for the company to plan and manage the pool. Longer windows
also reduce the grant's retention power and shift the advantage to ex-employees, who can wait for further
indications of potential upside instead of mandating the financial decision of paying the exercise price
immediately upon on leaving
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Should I Give Employees
Acceleration Clauses?
Acceleration
Clauses
Balderton does not recommend acceleration clauses for most employees

Where we see acceleration clauses for C-level executives, they typically provide acceleration for 50-100% of
unvested options when the criteria of a double trigger clause are met
What is it?
Enables options to vest before the scheduled date due to the achievement of a milestone, or to a company
event (exit, etc.), called a 'trigger'
Why is it not recommended?
Can be less attractive to an acquirer in the case of sale, as it requires the acquirer to re-incentivize talent with
new equity
What kinds of triggers occur?

Single trigger: A type of acceleration achieved through accomplishment of single criterion (most typically the
sale of the company). This is not very common.

Double trigger: Acceleration achieved through the accomplishment of a combination of two criteria (most
typically the sale of the company and the involuntary termination of the employee within 12-24 months after
sale). This is found more commonly than single-trigger acceleration.

Board discretion: A type of acceleration that is not automatic, but decided by the Board. This can be used to
reward some employees selectively.
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Should I Have a Bad Leaver Clause?
Good leaver vs.
Bad leaver
Balderton does not recommend bad leaver clauses for employees
What is it?

Allows the company to reclaim vested options from an employee who leaves under terms designated as
those of a 'bad leaver'
Why is it not recommended?

Tone: Starting your relationship with a new hire by negotiating the conditions under which they could lose their
equity sets the wrong tone for their future at the company

Reputation: Reclaiming 'bad leaver' equity will nearly always be discussed both internally and externally, and
can cause concern in existing and prospective employees about the security of their own stakes

Competition: Your competitors may impose bad leaver provisions in their options schemes, so avoiding this
could be a competitive edge in hiring

Objectivity: Employees should retain their earned part of the company's success regardless of the
circumstances of their departure
For specific circumstances, companies should consider clauses for 'super' bad leavers (e.g. fraud, criminal
behaviour against the company, etc.)
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When and Why Should I Give
Subsequent Grants to Employees?
Retention
Incentive
Reward
Evergreen / Refresh: Additional shares awarded on a regular basis beginning 3-5 years
after an employee's initial grant, to help mitigate the decrease in still-unvested options

May be another single, large grant, or repeating grants of 25-50% the size of a grant the
employee would receive if hired today (depending on length of vesting and grant cadence)
Performance-based: Awarded as part of a bonus package, linked to target performance
metrics of the individual, team, or company

Typically determined as a percent of base salary, then multiplier based on
performance levels
Discretionary / outstanding performance: Awarded to reward unique contributions

These grants should be for non-executives

The size of these grants might be as large as 50% of the size of the grant the employee
would receive if hired today
We believe every company should use equity for retention and / or incentives.
Some companies (e.g. LinkedIn) successfully use equity for rewards.
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As time goes on, the amount of unvested options from an initial grant declines
















As the amount of vested options increases, those that remain unvested become
less meaningful in incentivising the employee to stay with the company

Many companies begin to see turnover from employees as the date of their full
vesting approaches
Why Give Refresh Grants?
Vesting Schedule
Year
1
2
3
4
5
6
7
8
Grant
10,000
Yearly Vesting
2,500
2,500
2,500
2,500
-
-
-
-
Total vested at YE
2,500
5,000
7,500
10,000
10,000
10,000
10,000
10,000
% vested
25%
50%
75%
100%
100%
100%
100%
100%
Total unvested at YE
7,500
5,000
2,500
-
-
-
-
-
% unvested
75%
50%
25%
0%
0%
0%
0%
0%
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What Vesting Schedule Should I Use for
Refresh Grants?
Typical Terms
Typical Criticisms
Alternative
Schedules
Smaller, annual refresh grants or second large grant

Granted year 4 after initial grant, no delay before vesting begins, 25% / 25% / 25% / 25%
annual vesting schedule

Despite a range of potential schedules, none perfectly smooth the drop in outstanding
unvested options

Refresh grants, especially to early employees, are rarely meaningful in size and value
relative the initial grant

Back weighted: Granted year 4 after initial grant, no delay before vesting begins, 10% /
30% / 30% / 30% annual vesting schedule

Two-year: Granted year 4 after initial grant, 0% / 50% / 50% / 0% annual vesting
schedule
Refresh grants see more variability in their vesting structure than initial grants
You can find a more detailed planning tool for the size and vesting period of refresh grants here.
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To mitigate the decline of unvested options, 'refresh' grants can be issued to provide additional options to the employee

The new unvested options increase and extend retention incentives for the employee




















The size of these grants should be based on the employee's current value to the company (as if you were hiring him or her at the
time of the refresh)
You can find a more detailed planning tool for the size and vesting period of refresh grants here.
Vesting Schedule
Year
1
2
3
4
5
6
7
8
Grant
10,000
2,500
2,500
2,500
2,500
Initial Grant Vesting
2,500
2,500
2,500
2,500
-
-
-
-
Refresh 1
-
-
-
625
625
625
625
-
Refresh 2
-
-
-
-
625
625
625
625
Refresh 3
-
-
-
-
-
625
625
625
Refresh 4
-
-
-
-
-
-
625
625
Total Yearly Vesting
2,500
2,500
2,500
3,125
1,250
1,875
2,500
1,875
Total vested at YE
2,500
5,000
7,500
10,625
11,875
13,750
16,250
18,125
% vested
25%
50%
75%
85%
79%
79%
81%
91%
Total unvested at YE
7,500
5,000
2,500
1,875
3,125
3,750
3,750
1,875
% unvested
75%
50%
25%
15%
21%
21%
19%
9%
How do Refresh Grants Work?
One possible refresh grant structure:
Small annual grants made beginning in Year 4:
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While made at the end of Year 4, conversations around this type of grant begin earlier so that the employee is aware the grant will
be awarded as the unvested portion of his or her initial grant decreases

May be preferred because it offers clean refresh structure that mimics initial grant, does not set precedent for annual grants, and
makes the refresh grant the largest possible size optically

Does not mitigate turnover in later stages of vesting without early, proactive communication
Vesting Schedule
Year
1
2
3
4
5
6
7
8
Grant
10,000
10,000
Initial Grant Vesting
2,500
2,500
2,500
2,500
-
-
-
-
Refresh 1
-
-
-
-
2,500
2,500
2,500
2,500
Total Yearly Vesting
2,500
2,500
2,500
2,500
2,500
2,500
2,500
2,500
Total vested at YE
2,500
5,000
7,500
10,000
12,500
15,000
17,500
20,000
% vested
25%
50%
75%
100%
63%
75%
88%
100%
Total unvested at YE
7,500
5,000
2,500
-
7,500
5,000
2,500
-
% unvested
75%
50%
25%
0%
38%
25%
13%
0%
Another typical refresh grant structure:
Second large grant made at the end of Year 4 (to begin vesting in Year 5):
You can find a more detailed planning tool for the size and vesting period of refresh grants here
How do Refresh Grants Work?
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May be preferred because it smooths % unvested over time, and backweighting incentivizes retention through later stages of
refresh vesting
Takes longer time to build in terms of number of refresh options vesting each year, and potential dip in number of options vesting in
Year 5 may present retention risk
Vesting Schedule
Year
1
2
3
4
5
6
7
8
Grant
10,000
2,500
2,500
2,500
2,500
Initial Grant Vesting
2,500
2,500
2,500
2,500
-
-
-
-
Refresh 1
-
-
-
250
750
750
750
-
Refresh 2
-
-
-
-
250
750
750
750
Refresh 3
-
-
-
-
-
250
750
750
Refresh 4
-
-
-
-
-
-
250
750
Total Yearly Vesting
2,500
2,500
2,500
2,750
1,000
1,750
2,500
2,250
Total Granted
10,000
10,000
10,000
12,500
15,000
17,500
20,000
20,000
Total vested at YE
2,500
5,000
7,500
10,250
11,250
13,000
15,5000
17,750
% vested
25%
50%
75%
82%
75%
74%
78%
89%
Total unvested at YE
7,500
5,000
2,500
2,250
3,750
4,500
4,500
2,250
% unvested
75%
50%
25%
18%
25%
26%
23%
11%
Example of alternative refresh grant structure:

Small annual grants with 10% / 30% / 30% / 30% vesting schedule:
You can find a more detailed planning tool for the size and vesting period of refresh grants here
How do Alternative Structures Work?
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May be preferred because it smooths % unvested over time, and quickly builds in terms of number of refresh options
vesting each year

Shortens retention power of each individual refresh grant as effective vesting period is two years, and potential dip in
number of options vesting in Year 5 may present retention risk
Vesting Schedule
Year
1
2
3
4
5
6
7
8
Grant
10,000
2,500
2,500
2,500
2,500
Initial Grant Vesting
2,500
2,500
2,500
2,500
-
-
-
-
Refresh 1
-
-
-
-
1,250
1,250
-
-
Refresh 2
-
-
-
-
-
1,250
1,250
-
Refresh 3
-
-
-
-
-
1,250
1,250
Refresh 4
-
-
-
-
-
-
-
1,250
Yearly Vesting
2,500
2,500
2,500
2,500
1,250
2,500
2,500
2,500
Total Granted
10,000
10,000
10,000
12,500
15,000
17,500
20,000
20,000
Total vested at YE
2,500
5,000
7,500
10,000
11,250
13,750
16,250
18,750
% vested
25%
50%
75%
80%
75%
79%
81%
94%
Total unvested at YE
7,500
5,000
2,500
2,500
3,750
3,750
3,750
1,250
% unvested
75%
50%
25%
20%
25%
21%
19%
6%
Example of alternative refresh grant structure:

Small annual grants with 0% / 50% / 50% / 0% vesting schedule:
You can find a more detailed planning tool for the size and vesting period of refresh grants here
How do Alternative Structures Work?
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What are Variations on
Stock Options?
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Why are Alternative Types of
Equity Used?
The type and structure of equity you offer is usually driven by tax
considerations relevant to the country in which it is issued, as these
may significantly impact its value to employees.
In many countries, the tax considerations continue to change
and evolve.
We are not your tax experts, but you should talk to one if you have
questions! We can help you find local advisers or precedents to guide
you through this.
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What Structures of Equity are Most
Common in Specific Countries or Jurisdictions?
Country
Most common form(s)
ESO, mainly EMI

Tax efficient structures in UK: if EMI strike price set at market value, no tax to employee on
exercise (up to 250K)

Company should obtain a valuation agreed with HMRC before options are granted

Options are not tax efficient for employees

VSP mimics economic benefits for employees without providing voting rights, etc. of other
shareholders
Both are free to employee up front

BSPCE taxed as income; Free shares taxed as capital gains, depending on time held
(+ social charges)
BSPCE strike price based on share price

More tax efficient than options

Mimics economic benefits for employees without providing voting rights, etc. of
other shareholders

Options are not tax efficient for employees

Warrants: employee pays small amount up front

Shares: must be done on market terms, purchased by employee up front (ideal for low valuation)
VSP
BSPCE 'Founder Warrants',
AGA 'Free Shares'
Depository rights provided
through STAK
Warrants, Shares
Note: Please seek advice from qualified financial, legal, and tax advisors to understand the specific tax considerations of your jurisdiction(s).
Reason(s)
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What are the Other Types of Equity
Used in Other Situations?
Restricted stock units (RSUs)

What are they? RSUs represent a promise to issue common stock (or the cash value of common stock) at a later date at
the fair market value of the shares on that date

Are they recommended? They are not generally advisable for, or used in, early-stage companies due to their less
favourable tax treatment in most jurisdictions, more limited upside (but also limited risk), and their inability to be offered in
secondary sales
RSUs typically are not attractive for company or employee until the company is public, expect in specific




cases or jurisdictions where RSUs may be used for tax purposes
Employees are typically taxed upon delivery of the units (vesting, not exercise)
Note: RSU restricted stock
Growth Shares

What are they? A separate class of shares that reward employees (typically management or key employees) for growth
company above a "threshold" or "hurdle", specified at issue

Are they recommended? Although growth shares can be more tax-efficient than options in rewarding key team
members for achieving specific goals, they are generally unnecessarily complicated for early-stage teams. However, they
may be a good solution in the U.K. for later stage companies.
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How do I Present This
to the Board?
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Am I Required to Share Employee
Grant Details with the Board?
Yes, most shareholder agreements require you to share the ESOP scheme
with your board and to get board approval for employee equity grants
At a minimum, the board must generally approve any 'exceptional' grants
Employee grant approvals typically happen on at least a quarterly basis
After Series A, a Compensation Committee should be formed as a
subcommittee of the board, responsible for approving employee
equity grants
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What Should I Tell the Board
About ESOP?
1. It is helpful to present the employee options pool to the

board in the context of all existing shares outstanding

Build a summary cap table that includes a summary of


vested and unvested employee shares, as well as what

remains ungranted to employees within the pool
Company A - Summary Cap Table
Founders' shares
#Shares
% of Class
% Fully Diluted
Founder 1
2,500,000
50.0%
16.7%
Founder 2
2,500,000
50.0%
16.7%
Total
5,000,000
100.0%
33.3%
Employee options pool
Granted, vested
320,000
21.3%
2.1%
Granted, unvested
548,050
36.5%
3.7%
Proposal for approval
16,950
1.1%
0.1%
Ungranted ESOP
615,000
41.0%
4.1%
Total
1,5000,000
100.0%
10.0%
Preferred
Investor 1
1 ,100,000
12.9%
7.3%
Investor 2
600,000
7.1%
4.0%
Investor 3
3,000,000
35.3%
20.0%
Investor 4
1,750,000
20.6%
11.7%
Investor 5
2,050,000
24.1%
13.7%
Total
8,500,000
100.0%
56.7%
Total Shares
15,000,000
100%
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What Should I Tell the Board
About ESOP?
2. Create an ESOP grant plan and get approval from the board
See below for an illustrative example of what you can present to the

board on an annual basis to outline expected hires in the year to come
Company B - ESOP Grant Plan
Role
Standard Grant
Standard % Equity
Planned Hires
Total Options
Total % Equity
CFO
150,000
0.50%
1
150,000
0.50%
VP WW Sales
125,000
0.42%
1
125,000
0.42%
Sales Manager
10,000
0.03%
3
30,000
0.10%
Account Executive
3,000
0.01%
12
36,000
0.12%
Inside Sales Rep
1,500
0.01%
12
18,000
0.06%
Pre-sales Rep
1,500
0.01%
4
6,000
0.02%

Engineering Manager
10,000
0.03%
2
20,000
0.07%
Senior Tech Lead
4,000
0.01%
4
16,000
0.05%
Senior Engineer
3,000
0.01%
8
24,000
0.08%
Junior Engineer
2,000
0.01%
12
24,000
0.08%
Others
25
50,000
0.17%
Annual Total
84
499,000
1.66%
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What Detail Should I Show
About Individual Grants?
3. Provide a summary of all grants for which you are seeking approval

Highlight any exceptions to established ESOP plan and clearly articulate why.

See below for a specific example, unrelated
Company A - ESOP Grant Summary for Board Approval - 30-Jun-2017
Name
Role
Proposed Grant (# shares)
Type of Grant / Approval
Needed For
Exception ?
Reason for Exception / Notes
Strike Price
($)
Date Vesting
From
R.Geller
VP
7,500
Refresh
Y
One-time reward
4.15
30-Jun-17
J. Tribbiani
Jr. Associate
800
First grant
N
4.37
30-Jun-17
R. Green
Sales Mgr
1,000
Refresh
N
4.37
30-Jun-17
C. Bing
Director
5,000
First Grant
N
4.37
30-Jun-17
M. Geller
Director
1,250 Uplift for high performance
Y
Outside performance
expectations
4.37
30-Jun-17
J. Gunther
Sales Associate
800
First grant
Y
4.37
30-Jun-17
P. Buffay
Jr. Associate
600
First Grant
Y
Risky hire
4.37
30-Jun-17
Total to be approved
16,950
% of Total ESOP
1.1%
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Where Can I Find
More Information?
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Does Balderton Have any
Other Tools?
Balderton has created a workbook to help you better understand some of the topics
discussed in this deck. It offers worksheets for:
Grant Value Summary to express the size of an individual grant in different ways, and to
show its size relative to the rest of the budget in a given round

Initial Grant Vesting to show the quarterly vesting of an initial grant based on different
vesting schedules
Refresh Vesting to show the vesting of refresh grants based on different vesting
schedules, and how they impact the number of forward vesting shares for an employee
Board Summary Example: sample tables to summarize proposed grants for
Board approval
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Where Can I Read and Learn More?
Key resources:

Sources and additional resources: Employee Equity Resources

AVC (Fred Wilson's blog): series on employee equity

Thomson Reuters Practical Law: overview of tax / legal structures by region

Wealthfront equity plan and blog

Accion: overview of ESOPs and general education