At Nauto, we made a choice last year that equity should be earned with service. If you follow the Silicon Valley standard for equity, then you know that normally you have 90 days after departing a company to exercise your options or they are gone (even if vested).
For many people in later stage venture-backed startups, this could mean paying thousands more to keep something you have already spent time building. To address this challenge, we implemented a program that would help mitigate financial risk for our employees and enable them to extend the period in which they can choose to exercise their options.
Understanding the Extended Post-Termination Exercise Period (PTEP)
If you are unfamiliar with the term PTEP, it stands for the “Post Termination Exercise Period” for options. It is the period of time from Separation from Service, another term of art, until the right to buy the shares underlying an option lapses. At the end of the PTEP, the option is forfeited to the extent not exercised. For ordinary course Separation from Service, like a resignation or a termination not-for-cause, the standard in Silicon Valley is a 90-day PTEP. This means upon a normal departure from employment, the former employee has 90 days to exercise their equity or lose the option.
An EXTENDED PTEP takes that 90 days and extends the decision timeframe for the option holder. This means more time to think about whether to exercise, more time to assemble the funds to exercise should that be the decision, and more time to pass and see how things pan out. A company can choose to extend their PTEP however long it wants. Typically, the period is 5-7 years from the grant date of the option, which roughly translates to 1-3 years from when the option would have fully vested. At Nauto, we chose to extend the PTEP for the maximum permissible period of time: the life of the options (which is typically 10 years from the grant date). In our program, we chose to provide this option to all of our employees even for their existing grants. A whopping 82% of our employees chose to participate and we consider this program a major success!
How to Implement an Extended PTEP
If you are considering a PTEP extension (and you should!), it is best to get your Legal and People teams involved as soon as you can. There are some important questions you must ask yourself and consider before starting down a path of a PTEP extension program, here are the top 10 (but there are more, and your Legal and People teams will guide you):
- How would a PTEP extension program fit with the culture of the company?
- Will you cover only future grants or go back, and provide this benefit to all?
- How much of an extension will you give and what are the qualification criteria?
- How will you explain the choices you have made?
Board of Directors Considerations
- What is your company’s equity structure and what alternatives exist? What is needed to effect a PTEP extension under the company’s corporate documents?
- What will be the pros and cons of such a decision? For instance, what will be the impact on departures, post-employment dynamics, investors, dilution, securities exemption, etc.?
- What is the board briefing plan, and is there a compensation committee that will need to evaluate it first?
- If you decide to cover existing grants, depending on your workforce, the legal and economic implications of a PTEP extension will need to be explained in more or less detail. The tax implications in particular are thorny to explain. The company cannot provide tax advice to employees, though, or be anything but neutral in presenting the extension. It’s a tricky balance.
- This can all be expensive to figure out. You will need specialist legal counsel from your external law firm. Do you have the budget for putting this roll-out (communication plan and all) together?
- Timing is critical as the laws prescribe very strict windows. There aren’t do-overs. So once you press the “go” button everything must be lined up. Triple check - are you ready?
While these questions may make it seem like a PTEP extension program is a daunting thing, it is well worth the effort. In addition to the benefits we already mentioned, we learned in our roll out that many employees wanted more education about their equity anyway. There were lots of great questions and discussions during the Q&A session - some even among the participants. A PTEP extension program may not be the right thing for every company. It was the right thing for Nauto and it has already proven itself to be a great success.