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equity-101

A Guide to Understanding Startup Equity

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Introduction

Why Does Sift Offer Equity?

At Sift, we believe in the power of ownership. Equity isn't just an additional perk; it's a way to align our team with the company's long-term success. We offer equity as part of our total compensation package because we want every team member to feel invested in Sift's future. Understanding the basics of equity can help you appreciate the potential benefits and make informed decisions about your future with us.

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Here’s why we think equity is a compelling part of your compensation at Sift

Ownership Stake

Equity means you own a piece of the company. Your success is directly tied to Sift’s success.

Participation in Success

If Sift does well, the value of your equity can increase significantly.

Incentive for Long-Term Commitment

Equity typically vests over time, encouraging you to stay and contribute to our growth as a committed team member.

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We Believe That Compensation Is A Personal Decision

At Sift, we believe that every person is driven by their own unique situations. Compensation is personal and we do our best to meet the needs of our current and future Employees.

Offer Process

As part of the offer process, you’ll be given an opportunity to talk to our Recruiting Team about your preferences between cash and equity.

Participation in Success

The Sift Team has created a Compensation Calculator to help demonstrate how your equity compensation can increase as the company progresses through its natural stages. This is a visual exercise that showcases what your shares can be worth.

Equity Education

In extending previous offers, we’ve discovered that not all candidates fully understand how equity works. To address this, we proactively created this Equity 101 Page, ensuring that candidates interested in Sift have the information they need to make informed decisions.

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What Are Stock Options?

Stock options give you the right to purchase a certain number of shares of Sift’s stock at a predetermined price (the exercise price). You’re not officially a stockholder until you exercise these options. Essentially, equity compensation like stock options incentivizes employees with payments tied to the company's value. Once you exercise your options, you become a partial owner of Sift. Understanding how stock options work economically and the associated tax implications is crucial.

Equity Basics: Common Terms and Acronyms

Grant Date: The date when the option is given.

Exercise: The action of purchasing stock through the option.

Exercise Date: The date you buy stock through the option.

Exercise Price: The price paid to buy a share of stock.

Vesting Schedule: The timetable when an option can be exercised.

Fair Market Value (FMV): Market value of the stock on a given date.

ISO: Incentive Stock Option.

NSO: Non-statutory Stock Option.

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How Do Options Work?

Following the successful trial, Reliable transitioned into a full implementation with Sift. This integration will enable high-velocity, data-driven decision-making that's crucial to Reliable's mission. Reliable plans to leverage Sift's telemetry management solutions across all their simulation, test, and flight assets, streamlining data into a unified system for comprehensive analysis and review.

  1. Grant: Sift grants you stock options as part of your total compensation package. This gives you the right to purchase shares at a set price (strike price) in the future. The grant date is when the options are awarded, and the strike price is usually the current FMV of the stock.
  2. Vesting: Options vest over time according to a vesting schedule. At Sift, it’s 4 years with a 1-year cliff. This means 25% will vest after 1 year, with the rest vesting monthly over the next 3 years.
  3. Exercising: Once options are vested, you can purchase your shares at the strike price. You usually have a 10-year window from the grant date to exercise options before they expire.
  4. Selling: After exercising, you own actual shares which you can hold or sell. For private companies like Sift, selling opportunities may be limited to specific events like an acquisition or IPO.
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Caution & Risk

Illiquidity

Equity is typically illiquid, meaning it can’t be easily converted to cash.

Uncertain Value

The true value of startup equity is often unclear, especially in early-stage companies.

Dilution

As startups like Sift raise more funding, existing equity can be diluted, reducing your ownership percentage.

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Reading and Interpreting Your Stock Options Agreement

Equity compensation can have significant tax implications. Speak with your tax professional to understand how exercising and selling your options may affect your taxes.

Grant Date: The date when the option is given.

Number of Options Granted: The total shares you can purchase.

Type of Options: ISOs or NSOs, which affect tax treatment.

Strike Price: The price at which you can purchase shares.

Vesting Schedule: The timetable when an option can be exercised.

Expiration Date: The last date to exercise your options.

Exercise Window: Period to exercise vested options.

Termination Clauses: What happens if you leave the company.

Change of Control Provisions: How options are treated in case of a merger, acquisition, or IPO.

Tax Implications: Consult a tax professional for personalized advice.

Restrictions on Transfer or Sale: Any limitations on selling or transferring options or acquired shares.

Remember, stock option agreements can be complex legal documents. If unsure about any terms or implications, consult with a financial advisor or lawyer who specializes in equity compensation. Equity is a long-term investment in the company’s potential that comes with risks. It’s important to speak with a financial advisor to understand these risks.

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Tax Implications

Equity compensation can have significant tax implications. Speak with your tax professional to understand how exercising and selling your options may affect your taxes.

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Shared Growth, Shared Rewards

At Sift, we believe in the power of shared success. By offering equity, we aim to create a workplace where everyone is invested in our journey and benefits from our growth. Understanding how equity works can help you make the most of this opportunity. We look forward to building something great together!

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