Why GX extended our employee stock option exercise windows

Here's the thought process we went through at GX when extending our stock option exercise windows to be more employee-friendly.

Elizabeth Immen
November 23, 2022
Elizabeth Immen
November 23, 2022
A large window overlooking a wide landscape.
GX extended our employee stock option exercise windows to be more employee-friendly. (📸: Allen Perper via Unsplash)

One of our core values at Great Expectations is this:

Engage the full human being

We each bring more value than our skill sets to work. Invest in personal and professional growth. Connect with others as whole human beings. Frame all interactions with kindness, empathy, and compassion. Seek to resolve tensions. Practice resilience. Embrace conflict as learning.

As a company, one way we act out this value is by being employee-friendly in areas where standard business practices favor the corporation.

This year we made the decision to improve the chances our employees will exercise their equity options by extending our exercise windows.

Stock-options-as-compensation is common in the data and tech industry, and we weren’t the first company to make this choice. But it was surprisingly difficult to find “conventional wisdom” to support our decision process and operationalization.

So I want to share the thought process we went through at GX for other companies who, like us, want to lean employee-friendly.

Once we decided to extend the stock option exercise window, there were three aspects we needed to consider:

  1. How much will we extend the window by?

  2. What circumstances should the extension apply in?

  3. What impact will this have on existing grants?

Why we chose to extend our exercise window 

Equity grants can be used as a valuable retention tool: they’re a way to give employees a literal stake in the company they’re helping to build. 

The standard four-year vesting schedule can be thought of as a way to encourage the company and the employee to invest in each other long-term. Equity is a primary vehicle for employees to realize the benefits of that investment. 

At the same time, we recognize that each employee’s tenure will be different—some will be here 2 years, others 10+. But no matter how long they stay, each employee has already added value to GX, and they should be able to extract that value from their vested shares.

Since most employees won’t have the upfront cash to exercise their options within 90 days of their departure, we felt that the standard exercise window wasn’t in the spirit of mutual value creation. GX has already received value from the relationship: we want employees to have a more reasonable chance to reap their own rewards.

GX recognizes the benefits of equity grants as a retention tool, so we kept a 4-year vesting schedule and a 1-year cliff. But with a generous extended exercise window post-termination, we’re acknowledging equity is a recognition of the investment in GX that the employee makes. 

Extension considerations

How much will we extend the window by?

A historically typical practice, which significantly favors the company, is a 90-day exercise window. Going to the other extreme, the most employee-friendly option we could think of was to extend the exercise window to match the life of the grant. 

To balance employee and company interests, we settled on a progressive extension that updates at the anniversary of the vesting start date.

This looks like:

  • 1 year vested = window extended 1 year from termination date

  • 2 years vested = window extended 2 years from termination date

  • 3 years vested = window extended 3 years from termination date

  • 4 years vested = window extended 4 years from termination date

Under what circumstances will we extend?

It’s possible to create different exercise windows for different termination types, including:

  • Voluntary termination

  • Involuntary termination

  • Termination with cause

  • Death

  • Disability

  • Retirement

We chose to make the most employee-friendly move here and apply the progressive exercise window to all termination types other than termination with cause.

Our cap table management system, Carta, doesn’t support automatic progressive updates to the exercise window. So we decided to update the exercise window in Carta at termination, which is when it becomes relevant. This balances extra overhead for us (e.g. making updates annually) with clarity for employees.

What impact will this have on existing equity grants?

There are three factors we considered regarding how our employees’ existing grants could be impacted by this change:

  1. As best we understand, if a grant is “in the money”—meaning that the strike price is lower than the current fair market value (FMV)—the grant will immediately change to a non-qualified stock option (NSO) when an exercise window is changed. 
    Consequently, the timing of tax payment for exercised shares moves up to the time of the exercise rather than at the time of sale for incentive stock options (ISOs), minus AMT implications. 

  2. In order to receive long-term capital gains treatment, both ISOs and NSOs must be held for one year from exercise. However, ISOs must also not be sold before the two-year anniversary of the grant date.

  3. Independent of the exercise window (when the options expire), ISO grants will automatically convert to NSOs three months after termination of employment.

There could be other changes in specific circumstances, but broadly speaking, this is our understanding of the main differences between ISOs and NSOs, and those are the issues that we considered.

Implementing the extension

At the implementation of the extended exercise window, we split our existing grants into two categories:

  1. Non-exercised options that had a strike price equal to the current FMV

  2. Non-exercised options that had a strike price less than the current FMV

For category 1, we updated the exercise window without other action, as there was no other impact on the grant or employee.

For category 2, as there were possible impacts to the employee and the grant, we did two things:

  1. We gave existing employee option holders three alternatives to choose between:

    1. Keep their grant as it is.

    2. Implement the progressive extension of the exercise window and accept their grant’s conversion to NSO.

    3. Void their current grant and issue a new grant with a progressive extension of the exercise window (ISO) with the current FMV, which has a higher exercise price.

  2. As there were tradeoffs for these employees, we offered the opportunity to exercise these grants early. While this move works in the opposite direction of the logic to extend the exercise window (i.e. this assumes an employee will have the money sooner rather than later), it was a way we could offer greater flexibility to the employee, so it was the right thing to do.

Employee reception

The policy change was received with great excitement and appreciation by our team, with one employee saying GX was “the most human-centric company I’ve worked for.”

We believe that the financial success of our company is only one success metric: true success also means every employee feels their time here was supportive, engaging, and their best work experience yet.

Extending our stock option exercise windows is one step we took in working to meet those goals. But every day we continue to look for ways to be better at this so we can find and retain the best people in a competitive market.

Related: we are hiring in Product and Engineering. Would you like to work with us?

Disclaimer: This post is for general informational purposes only, and should not be construed or relied upon as legal or tax advice or recommendations.

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