|Level||Number of Options|
|Sr. Manager / Lead / Sr. AE||5,000|
|Manager / AE / Sr. Developer||2,500|
At GitLab we strongly believe in employee ownership in our Company. We are in business to create value for our shareholders and we want our employees to benefit from that shared success.
In this document (only accessible to GitLab team members and applicants), you can find some more details on the number of shares outstanding and the most recent valuations.
This guide is meant to help you understand the piece of GitLab that you’re going to own! Its goal is to be more straightforward than the full GitLab 2015 Equity Incentive Plan (the “2015 Equity Plan”) and your stock option agreement which you are advised to read, which both go into the full legal details. Please note, however, that while we hope that this guide is helpful to understanding the stock options and/or stock issued to you under the 2015 Equity Plan, the governing terms and conditions are contained in the 2015 Equity Plan and the related stock option agreement. You should consult an employment attorney and/or a tax advisor if you have any questions about navigating your stock options and before you make important decisions.
At GitLab, we give equity grants in the form of Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs). The difference in these two types of grants are, generally, as follows: ISOs are issued to US employees and carry a special form of tax treatment recognized by the US Internal Revenue Service (IRS). NSOs are granted to contractors and non-US employees. It’s called an option because you have the option to buy GitLab stock later, subject to vesting terms, at the exercise price provided at the time of grant. Solely for the purposes of example, if you are granted stock options with an exercise price of $1 per share of common stock today, and if GitLab grows later so its common stock is worth $20 per share, you will still be able to buy the common stock upon exercise of your option for $1 per share.
The reason we give stock options instead of straight stock is that you do not need to spend any money to purchase the stock at the date of grant and can decide to purchase the stock later as your options vest. In addition, we do not provide straight stock grants since this may subject you to immediate tax liabilities. For example, if we granted you $10,000 worth of GitLab stock today, you would have to pay taxes on the value of the stock (potentially thousands of dollars) for this tax year. If we give you options for $10,000 worth of stock, you generally don’t have to pay any taxes until you exercise them (more on exercising later). Again, this is a general summary of the tax treatment of your options and you should consult a tax advisor prior to taking any actions in the future which could trigger tax liabilities.
Vesting means that you have to remain employed by, or are otherwise a service provider to, GitLab for a certain period of time before you can fully own the stock purchased under your stock option. Instead of giving you the right to purchase and own all of the common stock under your stock option on day one, you get to own the stock under your stock option in increments over time. This process is called vesting and different companies offer vesting schedules of different lengths. At GitLab, our standard practice is to issue options with a four year vesting schedule so you would own a quarter of your stock after 12 months, half of your stock after two years, and all of it after 4 years. Vesting happens on a monthly basis (so you vest 1/48 of your options each month), but many vesting schedules include a cliff. A cliff is a period at the beginning of the vesting period where your equity does not vest monthly, but instead vests at the end of the cliff period. At most companies, including GitLab, this cliff period is generally one year. This means that if you leave your job either voluntarily or involuntarily before you’ve worked for a whole year, none of your options will be vested. At the end of that year, you’ll vest the entire year’s worth (12 months) of equity all at once. This helps keep the ownership of GitLab stock to folks who have worked at the company for a meaningful amount of time.
This section deals with dilution which happens to all companies over time. In general companies issue stock from time to time in the future. For example, if company XYZ needs to raise money from outside investors, it may need to create new stock to sell to those investors. The effect of additional stock issuances by company XYZ is that while you will own the same number of shares as you did before such issuance, there will be more total shares of outstanding and, as a result, you will own a smaller percent of the company – this is called dilution.
Dilution does not necessarily mean reduced value. For example when a company raises money the value of stock will stay the because the company’s new valuation will be equal to the old value of the company + the new capital raised. For example, if company XYZ is worth $100m and it raises $25m, the company XYZ is now worth $125m. If you owned 5% of $100m before, you now own 4% of $125m (20% of the company was sold, or, said differently, diluted you by 20%). The 5% stake was worth $5m before the fundraise and the 4% stake is now worth $5m.
"Exercising your options" means buying the stock guaranteed by your options. You pay the exercise price that was set when the options were first granted and you get stock certificates back. To give employees an opportunity to benefit from any existing tax incentives that may be available (including under the US and the Dutch tax laws) we have made the stock immediately exercisable. This means you can exercise your right to purchase the unvested shares under your option to start your holding period. However, the Company retains a repurchase rights for the unvested shares if your employment or other services ends for any reason. An early exercise of unvested stock may have important tax implications and you should consult your tax advisor before making such decision.
Also, while the company has the right to repurchase the unvested shares upon your termination of services, the company is not obligated to do so. Accordingly you could lose some or all of the investment you made. Because we are a young company there are lots of risks so be aware and informed of the risks. Please read this quora thread about most startups failing and this story of people paying more in tax for their stock than they get back.
Options are approved by the Board of Directors at regularly scheduled quarterly board meetings. After your grant has been approved by the Board you will receive a grant notice by email from eShares containing information relevant to the grant including the number of shares, exercise price, vesting period and other key terms.
There are two methods to exercise your shares:
Note for US residents: whichever method you choose, be sure to download the 83-b election form provided by eShares and file with the IRS within 30 days of exercise. Send a copy of the election form to the CFO.
You will most likely want to include the following letter when sending in the 83-b election to the IRS.
Department of the Treasury
«Address provided from eShares 83-b instructions»
To whom it may concern:
Please find enclosed two copies of the 83-b election in connection with my purchase of shares of GitLab Inc. common stock. Please return one copy stamped as received to my attention in the enclosed self addressed stamped envelope.
If you leave the company, you will generally have 90 days to exercise your option for any shares that are vested (as of the last day of service). You may not purchase unvested shares after your service has ended. If you fail to exercise your option within the 90 days after termination of service, your option will terminate and you will not be able to purchase any shares under such option. In addition, if not otherwise expired through termination of your employment, your stock options expire 10 years after they were issued.
Generally, the exercise price for options granted under the 2015 Equity Plan will be at the fair market value of such common stock at the date of grant. In short, “fair market value” is the price that a reasonable person could be expected to pay for the common stock, but because GitLab is not “public” (listed on a large stock exchange), the Board is responsible for determining the fair market value. In order to assist the Board, the company retains outside advisors to undertake something called a “409A valuation”. In general, the lower a valuation for the shares the better for employees as there is more opportunity for gain. Additionally, a lower exercise price reduces the cash required to exercise the shares and establish a holding period which can have tax advantages in some countries. We describe those here but as always check with your financial or tax advisor before taking any action.
Tax law is complex and you should consult a tax attorney or other tax advisor who is familiar with startup stock options before making any decisions.
For US employees with Incentive Stock Options (ISOs), you aren’t taxed when you exercise your options. Tax will be due on the gain or profit you make when you sell the stock (difference between the exercise price and the sale price). Depending on your holding period, the tax may be treated as ordinary income or capital gain. Please note, however, that any gain upon exercise of an ISO (difference between the exercise price and fair market value at date of exercise), even if you do not sell the shares, may be counted as a "tax preference" towards the Alternative Minimum Tax limit. You should contact a tax advisor to see if this would apply to you.
In addition to the benefits of a longer holding period the IRS does have an additional benefit for holders of Qualified Small Business Stock (QSBS for short). Currently, GitLab meets the criteria for QSBS treatment however, again the Company is not in a position to offer tax or legal advice so check with your own tax and financial advisors. We found this article helpful in describing the QSBS program in greater detail.
Generally, for Non-qualified Stock Options (NSOs), you are taxed on any gain upon exercise of a NSO (difference between the exercise price and fair market value at date of exercise). NSOs are treated much less favorably under tax law because they can be given to people who don’t work at GitLab. This complicates the tax law and is beyond the current scope of this document.
For our employees based in the Netherlands, the Dutch taxing authority has a similar concept in that only the difference between the exercise price and the fair market value is considered taxable. So if you exercise early there is no difference between the two and therefore no taxable gain. With respect to tax reporting, you report the difference between fair market value at exercise and the exercise price. So if there is no difference between the two, nothing needs to be reported. Once you have exercised options, then you will need to speak with your tax advisor about how to report them for the purposes of Dutch wealth tax. Again the Company is not in a position to offer tax or legal advice around early exercising or tax reporting, so check with your own tax and financial advisors.
Anyone is always welcome to ask our CFO any questions they have about their options, GitLab’s fundraising, or anything else related to equity at GitLab. However, everyone should also consult a lawyer before making important financial decisions, especially regarding their equity because there are complex legal and tax requirements that may apply.
Our team member Drew Blessing wrote about what he learned about stock options after starting to research them because he received them when joining us. His article is greatly appreciated but GitLab Inc. does not endorse it, any advise is his.