<aside> ⁉️ Equity can be very complicated and have significant ramifications to your taxes and personal finances. Unfortunately, founders and investors sometimes put employees at a disadvantage by failing to share information about their stock options. For this reason, Ride Report aims to provide as much transparency as possible for our stock options program.
However, this information is not legal or financial advice! We might occasionally be wrong about things, and we can't speak to your particular situation. If you are making a major decision such as exercising your options, consult a financial or tax advisor. We will be happy to provide any information you or they need to evaluate your choice.
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Stock options represent the opportunity (but not the requirement) to buy some stock in the company. Typically options are purchased ("exercised") at a point in the future, such as when the company exits.
<aside> 🤸 Exercising Stock Options The cost to exercise a stock option and purchase an actual share is called the "strike price". The strike price for your options will be determined based on what they are worth on the day they are granted, based on an independent valuation of the company.
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<aside> ⏰ Vesting Schedule Stock options are awarded to you over time according to a schedule. This is called "vesting". All employees and founders at Ride Report are on a 4-year vesting schedule with a one year "cliff". This means that you receive 25% of your options after your first year, and then every month thereafter you receive a chunk until you have reached your 4th anniversary. At that point you are "fully vested", meaning you now have all your options.
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<aside> 📈 Common Stock Valuation As the company raises new money or hits milestones, the valuation of the company will change and hence so will the worth of a share. The company will periodically receive a new independent valuation called a 409a valuation. This is the process by which we determine the current worth of the share (the "fair market value"). The 409a valuation also sets the new strike price for any options that are being granted.
While the fair market value changes over time, your strike price for your existing options does not. No matter when you exercise your options, the price is the same. This is what makes options potentially valuable – if the company does well, your strike price may be lower than what the options are worth. Sometimes much lower.
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<aside> 🧦 Common vs Preferred The 409a valuation discussed above is for the value for "Common Stock". This is the type of stock that all founders, employees and advisors get. The 409a valuation isn't the same as the the value of our investors' stock ("Preferred Stock"). The current Preferred Stock price is determined in our most round of funding and isn't something we currently disclose outside the company. Details like the Preference Multiplier and Participation Rights are available to you via Carta (you can read more about what these terms mean in the Carta’s Preferred Stock guide).
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<aside> 🥧 Ownership Percentages On its own, the number of options you own doesn't tell you much. What you care about is how much of the company you would own (when you exercise your options) as a percentage. Over time, your ownership percentage will change. This is because the overall number of shares of the company can and will change. Overtime, the company will issue more stock as it brings on additional employees, advisors and investors. Each time the company issues more stock, your ownership goes down. This is process is known as dilution. Dilution impacts all stockholders, including investors. However, investors generally don't mind this as long as the company's value is increasing. When this happens, dilution is owning a smaller slice of a bigger pie.
To help employees understand their stock options, Ride Report provides the current ownership percentages for all roles. Ride Report always gives percentage ownership numbers that are fully diluted, which means they are based on the total number of shares Ride Report available to be issued – that is, all stock, all stock options, and all future stock or options we plan to issue before our next round of funding. Many companies choose to give equity percentage numbers using a shares outstanding method, which is based only on the current number of shares that have been issued. This results in a higher % number, but it doesn't fully account for dilution that is already anticipated in the company's equity plan.
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<aside> 💸 Taxes and Early Exercise When you exercise your options, any difference ("spread") between the fair market value and the strike price is considered to be taxable income, even if you can't actually sell your shares. This can lead to perverse scenarios, such as employees having to forfeit their options when leaving the company because they can't afford to pay the taxes that would be owed from exercising them.
To help employees plan for this and other potentially problematic scenarios, Ride Report offers the option for you to "early exercising". This allows you to exercise your options before they vest, which allows you to minimize the spread by exercising when the fair market value is near or equal the strike price. This means you are taking on risk by purchasing them (the shares may end up worth less than you paid for them, or worth nothing at all). Given the financial and tax implications, it's a good idea to talk to a financial or tax advisor before early exercising your options.
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<aside> 📎 Incentive Stock Options when leaving the company To facilitate our early exercise program Ride Report offers employees “Incentive Stock Options” (ISOs). These options have the advantage of not being taxed when you exercise them. The drawback is that with ISOs you only have 90 days to exercise your options if you leave the company. Luckily, there is a way we can offer departing employees more time. When an employee leaves the company on good terms, Ride Report will offer the employee the option to extend their exercise window to up to 10 years from their original grant date. Doing so means that these shares will be considered “Non-qualified Stock Options” (NSOs). NSOs are different from ISOs in that they are taxed as soon as you exercise them. For many employees this may be much better than forfeiting your options due to the 90-day exercise window imposed by ISOs. You can read more about the tax differences between ISOs and NSOs in this Carta document.
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<aside> ❤️ *Our Employee Guide is publicly available and "open source", so that others can use it for inspiration or as the basis for their own guide.
Nothing in this guide should be considered legal or tax advice, mediation or counseling. This guide is licensed under the Creative Commons Attribution license.*
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