There are three common models for secondary stock sales by employees: (1) a percentage limit, (2) a dollar limit, (3) hybrid approach.
Percentage limit on secondary sales
Some companies choose a percentage of total holdings that employees can sell—e.g., up to 10% to 20% of each individual’s holdings. This range is typically chosen so that most of the employees stock continues to be held—incentivizing them to focus on the long term value of the company and its stock. For companies that have truly broken out and are worth many billions, or for very early employees, these amounts may add into the tens of millions of dollars. Sales of this magnitude create a potential disincentive for employees to continue to work. Moreover, they can lead to a two-class system within the company before a true liquidity event occurs (e.g., an IPO or large sale). This two-class system can be culturally jarring.
Dollar limit on secondary sales
Alternatively, some companies allow employees to sell up to a certain dollar amount. For example, Facebook allowed employees to sell up to $1 million in stock. This meant that, irrespective of the overall net worth of the employee due to Facebook stock, all employees could cash out a common amount that was life-changing but not distracting. In some cases a dollar limit may cause some early employees to leave the company if doing so unlocks their ability to sell larger amounts of stock. In reality, people who leave solely to sell may not have stuck around much longer to begin with.
Hybrid approach: percentage up to a maximum dollar amount
A recent middle ground is to take a “whichever comes first” approach—that is, employees can sell up to 10% or 20% of their holdings or $1 million in stock, whichever comes first, over the course of their secondary sales. If an employee holds $20 million in stock, they can sell up to $1 million, even though that does not trigger their 20%. Alternatively, if an employee holds $1 million in stock, they can only sell 20%, or $200,000. This ensures that employees continue to hold the majority of their stock as a motivator to keep building the value of the company.
Whichever model they choose, companies generally place the following limits on employee sales:
1. Employees need to be with the company at least one year and/or hit their cliff. If an employee has not hit her vesting cliff, she does not yet truly own her stock. It is very hard to try to claw back cash if that employee leaves before her cliff date.
2. The amount of secondary sold is limited to, at most, what the employee has vested. Companies can alternatively limit secondary sales to a proportion of what the employee has vested (e.g., “no more than 20% of what has vested”) in official programs such as a tender.
In general, refresher grants that occur later in the lifetime of a company are a fraction of the grants employees receive upon joining (with rare exceptions for true outlier performers or people who, for example, advance from an individual contributor to a VP and get a larger refresher grant to reflect this heightened position and impact). This means that most of the value employees get in stock tends to derive from the earliest grant; that will be their primary financial incentive to contribute to the long-term success of the company.
Obviously there are a lot of non-financial incentives to working for a startup: making their team and friends successful and contributing to the company’s mission, for example. However, it is always striking how much the financials matter, even if people claim otherwise.