Stock Option Plan Rule of Thumb No. 3

Advisor and Director Share Schedule from The Startup Garage
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This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.  

Subject Director And Advisor Shares To A Two-Year Vesting Schedule

Directors assume general corporate law fiduciary duties and potential liability from the very first day they serve on a company’s board. For this reason, independent directors expect to be compensated beginning day one. Highly sought after advisors expect similar rewards. Gradually vesting a director’s and advisor’s options align their compensation with their actual service while protecting the company in the event that they are prematurely removed from the board. In this circumstance, vesting only allows a short-lived director or advisor to receive the fraction of the option package that corresponds with the director’s or officer’s actual term of service.

Subjecting a director’s shares to a two-year vesting schedule also creates added performance incentive. By default, corporate directors are normally on a one-year term of service. Using a two-year vesting schedule encourages a director to perform well so that he or she is retained for a second term. Moreover, the two-year vesting schedule—as opposed to the four-year schedule typical of employee options—is preferred for directors because it magnifies the incentives for these influential individuals.  Options issued to advisors are typically treated the same, so long as the advisor is not otherwise being compensated by the company.

Vesting should be accelerated in the event of a change of control. Many directors and advisors will not serve on a board if this provision is not included. If the board determines that it is in the best interests of the shareholders to sell the company, the directors and advisors should not be restricted from sharing in the value of the acquisition merely because their shares have not yet vested.

Check back Monday, October 1, for Rule of Thumb No. 4: Set a Lenient Post-Termination Exercise Period When Possible.


Whether you have a question about Stock Options No. 3, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!
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About Tyler Jensen

I work with entrepreneurs who are looking to attract investment and get out of the "Garage". I am passionate about helping entrepreneurs start companies that matter. I helped launch over 100 Companies, Non-Profits and Social Enterprises. I consider myself a serial entrepreneur, startup coach & trusted advisor. * Launching New Companies (For Profit, Non-Profit and Social Enterprise) * Expert Business Plan Writer * Extensive Network of Business Relationships focused on Launch & Rapid Growth of New Companies * Startup, Growth, Marketing, Technology, Web, Business Systems * Trusted Advisor to CEO’s & Entrepreneurs * Capital Raising Strategy Development * Startup Team Development The first company I started and sold is VAVi Sport & Social Club which grew to over 25,000 members in six years, was recognized as San Diego’s 30th fastest growing private company in 2006 by the San Diego Business Journal and 32nd fastest in 2007, and sold for over 25X the capital investment.