Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / How Founders Are Using Rolling Options to Retain Talent
Transcript
- Lucas: So I was digging into a term sheet last week, and I noticed something I hadn't seen before — a rolling options clause. Not a rolling SAFE, not a rolling no-cap note, but actual employee options that reset based on hitting milestones. Luna: Rolling options? That's a new one. What does that even look like in practice? Lucas: Imagine you grant an engineer options that vest over four years. But instead of a fixed schedule, the vesting extends or resets each time the company hits a specific product goal. So if they ship version two on time, their next tranche unlocks, and the clock resets for the next milestone. Luna: So the employee never fully vests unless the company keeps hitting its targets? That sounds like it could go either way. Lucas: Exactly. The pitch is that it aligns incentives for employees to actually drive the company forward, because their equity keeps rolling. But the risk is that if the company stalls, they're stuck with unvested options and no way to leave without losing everything. Luna: That feels like a recipe for burnout. Or at least for some very awkward conversations in the exit interview. Lucas: Right. Let's talk about a concrete example. A fintech startup I've been following recently used rolling options to retain their lead engineer. They were in the middle of a Series A raise, and this engineer had a competing offer for twice the salary. The startup couldn't match the cash, so they offered rolling options tied to the successful launch of their new mobile app. Luna: And did it work? Lucas: So far, yes. The app launched on time, the engineer's options rolled forward, and they've stayed. But the founder told me the negotiation was brutal. The engineer had a lawyer review the clause, and there were three rounds of redlines before they agreed. Luna: I can imagine. A lawyer is going to look at that and think 'you're asking my client to sign away their guaranteed equity for a gamble on the company's roadmap.' Lucas: And that's the crux. Rolling options work best for people who are already bought into the mission and are willing to bet on execution. It's not for everyone. But in this market, where big tech is poaching talent with huge cash packages, startups need creative ways to retain their key people. Luna: Speaking of market, have you seen the recent moves in some of those big tech names? Microsoft, Alphabet, Amazon are all up double digits over the past week, while smaller names like Shopify and Roblox are getting hammered. Lucas: Yeah, the divergence is striking. When the big guys are strong, they're vacuuming up talent with massive comp packages. That puts pressure on startups to get creative with equity. Rolling options are one way to make the upside more compelling without burning cash. Luna: But what about the board? Are they actually approving these structures? I'd think they'd be skeptical about giving away equity that might never vest. Lucas: That's the interesting part. Some boards love it because it protects the cap table — if the company doesn't hit milestones, those options never convert. But others worry that it creates a culture of short-termism, where employees focus only on the next milestone instead of the long-term vision. Luna: So it's a double-edged sword. How do founders decide if it's the right move? Lucas: The founders I've talked to say it comes down to the specific role and the stage. For a key technical hire who's critical to a product launch, rolling options can be a powerful tool. But for general hires, it's probably overkill and could scare people off. Luna: And what about the tax implications? Are these treated like regular incentive stock options? Lucas: That's a gray area. The IRS hasn't issued clear guidance on rolling options yet. Some accountants treat them as performance-based vesting, which could trigger alternative minimum tax implications. Others say it's too risky to assume any tax benefits. So there's a lot of uncertainty. Luna: That's a big hurdle. I can't imagine a founder wanting to be the test case for the IRS. Lucas: And that's partly why we're seeing this trend mostly in private companies, not public ones. The flexibility is easier when you're not under SEC scrutiny for compensation disclosures. Luna: Before we go deeper into the mechanics, I want to mention something that's been on my mind. We've been doing this show for a while now, and it's completely ad-free, which is rare these days. If you're getting value from these conversations, and you want to keep them coming, there's a small way you can help. Lucas: Yeah, it's just a coffee. If today's episode was worth the price of a cup to you, that's the link — buy me a coffee dot com slash fexingo. Every little bit goes directly to keeping the lights on and the mics hot. Luna: Exactly. No pressure, just appreciate the support. Now, back to rolling options — there's another angle I want to explore with you. Lucas: Sure. What's on your mind? Luna: I was thinking about how this connects to the broader trend we're seeing in Series A pitches. Founders are now highlighting their retention strategies as a key metric. I saw a pitch deck last month that actually had a slide on 'retention engineering' — including rolling options for critical roles. Lucas: That's a sign of the times. VCs are increasingly evaluating not just the product, but the team's ability to keep their best people. A strong retention strategy can be a differentiator in a competitive market. Luna: But does it actually move the needle in due diligence? I'm curious if investors are truly factoring this into their decisions. Lucas: From what I've seen, it's more of a tiebreaker than a deciding factor. If two startups are otherwise equal, a robust retention plan can tip the scales. But if the product isn't there, no amount of options will save you. Luna: That makes sense. So what's the takeaway for founders listening? Should they consider rolling options for their next key hire? Lucas: I'd say it's worth exploring, but with eyes open. Make sure you have a lawyer who understands the nuances, and communicate clearly with the employee about the risks and rewards. It's not a silver bullet, but it's another tool in the toolbox. Luna: And maybe start with a smaller pilot. Hire someone with a rolling option and see how it plays out before rolling it out more broadly. Lucas: Funny you say that — that's exactly what some founders are doing. Using rolling options as a test case for one key role, then deciding whether to expand it. It's a smart way to manage risk. Luna: I wonder if we'll see this become standard practice in the next few years, or if it'll fade away once the market stabilizes. Lucas: That's the million-dollar question. In a way, these innovative comp structures are a symptom of the current environment. If the market cools and talent becomes easier to retain, we might see less need for gimmicks like rolling options. Luna: Or maybe they'll evolve into something more sophisticated. The 'rolling' concept could apply to other types of incentives too. Lucas: I think you're right. We're already seeing variations like revenue-based options, where the vesting is tied to the company's revenue growth. It's all part of a broader movement to tie compensation more directly to performance. Luna: And that's ultimately what every founder wants — a team that's aligned with the company's success. Lucas: Exactly. Rolling options are just one way to get there, but it's a fascinating experiment. We'll be watching how it plays out over the coming quarters. Luna: Before we wrap up, any final thoughts for our listeners? Lucas: Just this: don't be afraid to experiment with compensation, but do it deliberately. Talk to your lawyers, talk to your employees, and make sure everyone understands what they're signing up for. The last thing you want is a retention tool that drives people away.