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How to Make Startup Stock Options a Better Deal for Employees

Venture capital structures were set up for a world in which successful companies exited in six to eight years and didn’t raise too much capital. Today, venture capital growth funds are now giving startups the cash they would have received at an IPO. This has moved the need for an IPO out another five years, allowing VCs to capture the increase in market cap in the company. And the market cap at IPO time will exceed anything yet seen for startups. Stock options with four-year vesting period are no longer a good match for employees when it may take 10 to 12 years for the company to go public or be acquired. VCs need to consider a new stock incentive model: Restricted Stock Agreements for the first key hires and then Restricted Stock Units for everyone else. When a group of engineers launched Fairchild Semiconductors—the first chip startup in Silicon Valley—in 1957, investors offered the founders a relatively new type of compensation: stock options. How to Make Startup Stock Options a Better Deal for Employees

thumbnail courtesy of hbr.org

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