If you’re living in 2020, then you are living in the time of COVID-19. Stress levels are at an all-time high as the virus ravages lives and livelihoods. The health scares and symptoms are enough to give anyone anxiety, but one glance at the LinkedIn pages and one finds their homepage is inundated with a sad truth: many people are being laid off and companies are shuttering or downsizing.
It is in this environment that folks are focused on getting through a very tough moment, putting other ambitions they had aside to face a reality that they must confront--survival. Faced with a lay-off, a person is thinking about the next mortgage payment or paycheck. It is in these trying times that it can feel like hope is at a deficit. For those employed by private, venture-backed companies, there is often an additional process that reminds them of what they had hoped for and perhaps still do before everything changed: the exercise of their equity (usually in the form of options).
The choice for folks who are laid-off with unexercised options is tough. Presumably, they joined a venture-backed startup with some portion of their compensation represented by options. In other words, they staked their hope on the idea that at some point in time, there will be a large payout from the equity they earned (their vested options). At the time of departure, however, they realize that the usual Silicon Valley standard for options applies to them:
You have 90 days to exercise your options or they are gone. Yes, even vested options are forfeited if the underlying shares are not bought in time. Unvested options are forfeited immediately. For many people, particularly those in later-stage venture-backed startups, this means having to pay thousands or tens of thousands of dollars to keep the equity (equity they may believe have been EARNED with time). Faced with a lay-off the stakes are much higher and the choice much harder to contend with.
Our Philosophy about Equity
At Nauto, we went a different path regarding options even before coronavirus was part of the daily vernacular. We made a choice last year to recognize that equity should be earned with service, and shouldn’t require a payment to purchase. When an employee departs Nauto after serving the company well, they should not have to make the difficult (and often immediate choice) to pay money to Nauto to exercise their options or forfeit all of their options. It is our philosophy that after two years of service, employees have earned the right to keep their options as long as possible without having to buy the underlying shares.
Our hope is that this will allow folks to delay the purchase until a convenient time to buy, or (even better) allow our employees to delay the purchase all the way to the liquidity event so they are never out of pocket for the share of equity they earned. Delaying the purchase is, of course, optional for our employees and they can choose to exercise their vested options at any time. What this ultimately means is that our employees are no longer held to the 90-day timeframe of exercising their options when they depart Nauto. We are providing them a choice that has its own risk/reward calculation.
Benefits of an Extended Post-Termination Exercise Period (PTEP)
Besides knowing that we were taking care of our employees, there were other major benefits to the implementation of a PTEP. One major positive side-effect of the program is that we found time to educate our employees about their options. The program itself requires many meetings for its roll-out along with detailed explanations of what will change. We held many meetings, and found that even without the PTEP, folks had questions about how their equity worked. It was wonderful to be able to sit down and educate our team members on the value of the options they held.
Contrary to some beliefs about implementing a PTEP extension, we did not see any increase in our employee attrition as a result of having it. In fact, the initiative has been a wonderful recruiting tool, helping us to win talent. The feedback we have received about this program from our current employees has been encouraging, assuring us that we have made the right decision for Nauto and for our employees.
The choice to provide our employees with the PTEP has proven itself in these difficult times. We have already seen the goodwill it has generated and the trust from our employees that we want them to have what they have worked hard to have. For those who have departed Nauto, we wanted to help remove at least one burden with the extension and for those who are still here, we have given them even more reason to hope for a great outcome for the company. And, what better medicine can you give in times like these than a little hope?
Curious how our Legal & People teams made PTEP a reality for our employees at Nauto? Check out our next People & Culture installment.