Digital Sign Equity Participation Plan Made Easy

Signature equity participation plan

what's up everybody I'm Jesse Showalter and in this episode we're to be talking about equity offer terms that you might encounter at a startup what's a stock option does that mean I own a piece of the company am i rich and the quick liquidity what's a cliff strike price is bad right liquid liquidity liquidity event see what I mean confusing [Music] [Applause] most people with the occasional exception of a finance expert are gonna look at their equity offer and say yes I understand everything that it says right there most people are gonna end up doing what I did which is just nodding their head and going cool sounds good so to help bring a little bit of clarity I've assembled a list of the five most common terms you'll hear in an equity offer we're to talk about what they are what the literal definition is as well as what the practical meaning is for you okay let's talk about one the most common terms that you'll hear when dealing with an equity offer and that is options usually you'll hear referred to as a stock option and what does that mean does that mean that you own stock now in the company do you need to demand a better office because you own a large portion of the company and now you're the boss that's absolutely not what that means the literal definition of an option is a contract that allows you to buy or exercise your right to the shares in the company at a later date what does that mean practically you don't own shares of the company yet you own the right to buy them later all right the next term that you might hear quite often is that of a cliff usually it's a one-year cliff so what is a cliff and why are they important - well companies can't go throwing away pieces of equity at every single person that they hire just to let that person quit or be fired or not work out within a week or a month you can't offer somebody equity and have them walk away with it after a week that's just not really smart business and so one year cliff is established to say you need to work out you need to actually be a good employee and stay here for at least a year for a portion of your equity options to be available to you the practical definition of a cliff is that you're not going to get anything if you don't work well with the team if you and the company don't mesh well so that's pretty much cliff alright when talking about a cliff you might have heard me mention the fact that you'll receive a portion of your equity options after that one-year period why apportion why not the entire thing well the next term that we're going to talk about explains that and it's called a vesting schedule so just like you're not getting that 0.1 percent equity of the company right when you sign up as an employee and you're not getting the entirety of it when you hit that one year cliff you need to continue to stay with the company and so they're gonna set up a vesting schedule which means that each month after you pass that cliff you will receive a portion of your options granted to you again there's still options they're not full-blown stock that you own it's the option to buy option to exercise but every month you stay with the company you'll get a little bit more and so your company will set up a vesting schedule sometimes it's a three or a four year vesting schedule and you have to stay on board to get all of that equity if you're wondering how much you're gonna have to pay to exercise your right to these stock options later on down the road well that's when we'll use a term called the strike price the strike price is a price that's set contractually at the beginning of your employment that says here's how much you will buy your equity for based on the current valuation of the company that's really really good news because later on hopefully if your company is valued for ten times more you don't have to buy stock for that ten times more price you can buy it for that initial lower price it's a contractual agreement that's made at the beginning you're guaranteed to be able to buy it at that price the distance or the the difference between that original strike price and what the company is valued at now that's called the spread you can buy stock for a lower price even though it's worth more that's the basic definition okay the last thing I want to talk about is what you can do with your stock options what are they worth and how do you make money off of all of this well in this case the term liquidity event is really really important you might see it noted in your equity contract like this in the event of a liquidity event dot-dot-dot this is what's going to happen the literal definition of liquidity event is when your company is either acquired by a larger company or goes public and becomes an IPO and it is traded publicly on the market it's basically when your shares become worth something at this point in time you have the opportunity to trade or sell your shares to actually value out of the options you've held on to for all of those years and so this might be the time where you take that dream vacation put a little bit extra in your savings or by your office dog or cat that little home they've always dreamed of well that's it those are five of the most common equity offer terms that you'll kind of deal with if you're working at a start-up I hope you guys enjoyed the video if you did make sure to leave a thumbs up subscribe to the channel I do lots of videos about design and development and business stuff just like this so maybe stick around if you have any questions whatsoever leave them down in the comments and I'll answer them as soon as I can hope you guys are having an amazing week designing amazing things making amazing things and making smart choices on where you work I'll see you in the next one