The Advisors' Blog

– John Jenkins

Here’s a blog from Andrew Abramowitz noting that one well-known VC firm – Andressen Horowitz – is recommending a 10-year option exercise period for departing employees. Why do this?  Andressen Horowitz puts it this way:

While everyone wants to do what’s best for the lifeblood of the company — the former, current, and potentially future employees — the 90-day exercise essentially pits cash-rich employees against cash-poor ones. And that isn’t right. Employees who have vested their hard-earned options should not have to forfeit their stock simply because they don’t have the financial resources to exercise their options and pay the resulting taxes.

While this recommendation applies to startups, innovations in Silicon Valley tend to migrate to publicly-traded companies pretty quickly, so this is something to keep an eye on.  The Andressen Horowitz piece is worth reading in its entirety, because it discusses many of the potential pitfalls of this extended exercise period as well. In addition, see this DLA Piper memo on the topic.

This evolving view toward the appropriate post-departure exercise period for options may be part of a broader evolution in Silicon Valley’s equity compensation practices.  As this NY Times article recently observed, some Silicon Valley companies are taking a more liberal approach to allowing employees to dispose of a portion of their stock prior to an IPO – while at the same time requiring employees to agree to more explicit restrictions on their remaining shares.