90-day exercise windows
Stock plans present a surprisingly large number of ways to make very expensive mistakes. – Clerky
The 90-day exercise window is a costly trap that can cost you hundreds of thousands of dollars down the line. Employee equity programs can be unfair in a number of ways, but the exercise window issue is uniquely pernicious in its ultimate cost to the employee.
As a job seeker, you should likely avoid private companies with 90 day exercise windows unless you are personally wealthy or senior enough to negotiate it out of your contract.Background
A lot of silicon valley tech companies give a large fraction of their compensation in company equity, rather than in cash. A typical engineering offer at a private company might have 30-60% of the total compensation given in equity.
This equity  can take many forms, including
- Restricted stock (or Restricted stock award (RSA))
- Incentive stock options (ISO)
- Nonqualified stock options (NSO)
- Restricted stock units (RSU)
and a few others.
ISOs and NSOs are collectively known as “stock options”. At a high level, stock options give you the option to buy shares of the company in the future, at a certain fixed price.
The process of buying those shares is known as “exercising your options”. After you leave a company, you have a fixed amount of time to exercise your options. That time is called the “exercise window”. It can vary from 30 days to 10 years. After the exercise window closes, the options expire, and the company can reissue them to new employees.
What’s the problem?
Short exercise windows are fundamentally employee unfriendly, especially to non-wealthy employees. If the company has a short exercise window, then most employees will not be able to afford their options, thereby giving up 30+% of their compensation.
Let’s dive into each piece of this.Exercising is expensive, if the company is private
If the company is doing well, exercising your options generally costs tens to hundreds of thousands of dollars. You have to buy the shares, and pay taxes that can be higher than the cost of the shares themselves. Let’s call this the “cost to exercise”.
If the company is public at the time that you exercise, you can immediately sell some of the shares you just bought to cover the cost to exercise . You don’t need a lot of cash on hand to exercise your options.
However, if the company is private at the time you exercise, you have to pay the cost to exercise with cash you already have. After exercising, you receive a complicated financial asset (stock in a private company) that you likely can’t turn back into cash for years.Most employees leave while the company is still private
Even in successful companies, it’s rare for early employees to stay till IPO. The current median time-to-exit for SAAS companies is about 9 years. And successful companies go through many stages of company culture — just because someone liked the company at 200 doesn’t mean they’ll like it at 2000.You use it or lose it
Unlike every other form of equity compensation, options are use-it-or-lose-it. If you don’t exercise your options within the exercise window, they expire.
Assuming you leave before the company goes public, a 90 day exercise window means the company will still be private when your options expire.
At that point, you have to either come up with the cash to exercise, or walk away from your options. Based on anecdotal evidence, people walk away. Usually it’s the right decision financially — it doesn’t make sense to lock up $100k in an obtuse, undiversified financial instrument you can’t value , and can’t turn back into cash. But even when it’s not, it’s not easy to hand over that kind of money to a company right as you’re leaving your job.
Note that walking away means giving up 30+% of your compensation from the entire time you were working at the company. That is a bitter pill to swallow.
How do I know if my offer has a short exercise window?
Here is a quick flow chart, for “does my offer have a short exercise window”?
The offer is from a public company — no
The offer talks about RSUs, RSAs, or restricted stock — no
The offer lets you early exercise , and you can afford to do so — no
The offer has something with 30 or 90 days in it — very likely yes
The exercise window is 7 or 10 years — no
The exercise window is 5 years or less:
The company is actively preparing for an IPO — no
otherwise — probably yes?
You can find the terms governing the exercise window in one of the documents that comes along with your offer letter. (It usually will not be in the main offer letter itself.) It might be called a “Stock plan agreement” or “Stock option award” or “Discretionary bonus” or something else. Sometimes companies ask you to sign their offer letter without giving you this document at all, so you may have to ask for it.
Note that options always expire after 10 years, regardless of the exercise window. So just seeing 10 years in the contract is not enough to know how long your exercise window is.
If an offer has a short exercise window, typically (in Silicon Valley) it will be 90 days.
What if I get an offer with a 90-day exercise window?
There are a few options for when an offer has a short exercise window.
- Just say no.
- Negotiate your way out of it.
- Deal with it.
Here are my thoughts on each.
Just say no. This is what I do, and what I think most of my financially savvy friends do. Even if you could negotiate out of it, the other thing that I’ve noticed about startups with 90-day exercise windows is that they (a) tend to have other employee-unfriendly policies, like restrictions on early liquidity, and (b) tend to have leaders that are unsophisticated about startup finance.
Generally (a) follows from (b). I have a lot of thoughts on (b), but the basic problem is that even in a moderately successful exit, by default most of the gains go to the VCs and founders. A well-meaning, but financially unsavvy founder will likely lose much of the money that should have gone to the employees to their highly savvy VCs. (More thoughts on this at the end.)
Negotiate your way out of it. I haven’t tried this, but it’s worth a shot if you end up having to take this kind of offer. Technically (i.e. legally) it is possible for the company to make exceptions for individual employees, and I expect they do so for senior hires and squeaky wheels.
Deal with it. There are lots of possibilities besides “pay up at termination or walk away” if you are rich, many of them reasonable. The two suboptions there are to DIY-understand how options work, or get a financial advisor to help you evaluate your offers. I’d say the DIY option is comparable in difficulty to changing your car’s brake pads — easy if you generally feel comfortable with the area (mechanical engineering in the brake pad case, and law/finance in the options case), and better to get a professional if you don’t.
But note that you don’t have to settle for 90-day exercise windows at all. Only companies at a certain size tend to give options anyway, and many brand name companies that give options do so with long exercise windows.
How should I bring it up?
It’s always a question I ask in the initial meeting / recruiter call, since there’s no point in continuing the interview process if it’s a 90-day window.
E.g. if 80% of companies had a 5 day work week, and 20% of companies had a 6.5 day work week for the same pay, I would just restrict my search to the 80% of companies with the 5 day work week. It’s the first thing you’d want to know when evaluating whether to interview.
Sometimes (especially for very small companies), the founders/recruiter won’t understand the question, in which case I send them some of the resources linked to at the end.
Aren’t 90-day exercise windows standard?
They were a standard for a long time. They made a lot of sense in 2000, but don’t make any sense in 2020. I hear the “it’s a standard” argument from founders and VCs but it’s naive at best (if coming from a founder) and disingenuous if coming from a VC. It’s a bit out of scope for this article to explain what changed between 2000 and 2020, but some of the resources at the end get into it.
How about exercise windows that change depending on how long you’ve been at the company?
Typically this means it’s 90 days for the first 2-3 years, and then some other number after that. If you take the offer, you can just treat it like a 2-3 year cliff.
However, I would still avoid. Even if you plan to stay at the company for 2-3 years, I would be concerned about the company’s commitment to do the right thing by its employees.
Usually the argument given by the company is “we want employees that are committed to the long term.” However, there are many ways to both be honest and encourage employees to commit for the long term — a later cliff, a longer vesting schedule, a back-weighted vesting schedule (where you vest more in year 4 than year 2), etc. If some of those sound employee-unfriendly it’s because they are… they are just more straightforward about their intentions.
My options/RSUs/etc say they expire 10 years from when I get them, not from when I leave.
That’s OK. It’s due to legal restrictions out of the company’s control.
Isn’t it expensive for a company to provide long exercise windows?
It is. Paying market rate is much more expensive than paying market rate to rich employees and paying 70% of market rate to everyone else.
It is true that 7 and 10 year exercise windows have an administrative overhead, which is sometimes what people mean when they say it’s expensive. However, it’s crazy that the solution to “payroll is hard” is to tell your employees you’re paying them, while knowing full well most of them won’t be able to afford to collect the money.
I treat all my equity as $0 anyway (alternatively: I just think of equity as a lottery ticket, so I won’t be bummed if it turned out to be worth nothing).
Equity can end up being worth a lot or a little, but it is not really a lottery ticket. If you compare your private company compensation with what public companies offer for the same role, you’ll see that it is really meant to count as pay.
Sometimes people new to tech are so blown away by the base compensation that they think they would be ok with a 50% pay cut (e.g. ignoring the equity component of all their offers).
Unless you have millions of dollars already, I think you will really value having had that 2x salary down the line. The bay area is expensive, and tech can be a draining place to work (so being able to take a year off here or there is nice). Also, I think it’s easier to be ok with a 50% cut while you’re at your job and things are working, than after you’ve quit and are looking at where you stand financially.
This stuff is too stressful to think about (alternatively: I have enough money, and would rather not think about this stuff).
I recommend hiring an employment lawyer to help you evaluate and negotiate your offers, or asking a financially savvy friend. (Note: If you would feel awkward about sharing the full offer contracts with the friend, you should just get a lawyer.) It might feel expensive (~$1000), but it’s a small price given the amount of money involved. A year of car insurance costs at least $1000; think of this as employment insurance for the amount of time you’re at your job.
Alternatively, just restrict your job search to public companies. Even if you don’t understand the legal details of the offer, it’ll basically be fine.
I was recently on the job market, and every company I applied to had a story for how they were going to be a $10B company. And on the hiring side, I often talk to candidates who are swayed by these stories.
If you have the luxury of having multiple offers, I would ask each company to give you a second offer with lower equity and higher cash, or higher equity and lower cash (the second can be easier for companies than the first).
With those two data points, you can figure out how much the company actually values its equity, and use that to convert the number into an equivalent “all cash” offer. The “all cash” numbers can then more easily be compared across companies, or to the public companies listed at levels.fyi.
This is imperfect in many ways, and if you have a more sophisticated way of comparing you should certainly use it. Sometimes it makes sense to value a company’s equity higher than the company itself values it, and I’m also not suggesting that all of the $10B stories are false. But, for most employees that aren’t also investors-on-the-side, I would mostly ignore the stories and use the number the company uses when its checkbook is on the line.
Attitudes have changed a lot from 2015 to 2020 (to be more employee-friendly), so it’s worth looking at when articles are written. The first company to give a 10 year exercise window was Quora in 2014.
Y-combinator on why 90-day exercise windows are bad:
https://blog.samaltman.com/employee-equity (search the page for ‘90’)
Putting this first since YC’s brand is so strong, and I think founders are sometimes surprised to learn that Sam Altman has an opinion on it.
This issue is also the main design consideration talked about at https://www.clerky.com/yc-stock-plan-forms (search for “exercise”) — the stock plan paperwork used by nearly all YC startups.
Great answer from the founder of Quora, giving the employee perspective:
Another great answer, giving the company perspective:
Excellent long form (somewhat technical) discussion on the issue:
An easier-to-read treatment, that also links to a (several years out of date) list of companies that offer extended exercise windows:
Andreessen-Horowitz (prominent VC) on the wrong side of history:
This is from 2016 but I expect that is their position even today. The choice of exercise window is essentially a 0-sum game between the VCs, founders, and junior employees.
In my last job search I talked to multiple founders that let their board (i.e. their VCs) handle creating the employee paperwork. This is a major red flag.
The current cultural norm is that founders look out for employees, early stage VCs occasionally look out for founders, and late stage VCs look out only for themselves. If the board is creating the options paperwork, they are going to do the right thing for their funds and put in a 90-day exercise window.
 yes, technically not all of these are equity. I will make some major simplifications in the interest of keeping this readable. See “Other resources” at the end for more technical treatments.
 There are considerably more tax-advantaged ways to exercise than this, so don’t actually do this if you have the means to do something else. But this is a high lower bar, that’s available no matter what your financial situation is.
 Even if you had the financial background to tell whether your company was worth $2B or $3B after looking at the company’s financials, unless you’re a senior executive you won’t have access to the company’s financials.
 Early exercise is a bit out of scope for this document, but if you’re applying to a company that has options it’s worth looking it up and seeing if it applies. Some companies allow it and some don’t, and sometimes it’s affordable and sometimes it’s not.
Author: Rishi Gupta
Date: December 2019