Zenefits tackles another founder pain point with automated stock option management

By Michael Carney , written on July 25, 2014

From The News Desk

There are things only founders understand about building a company. Some of them are abstract, like the psychological toll of carrying the the responsibility of employees' livelihoods and investors capital on your shoulders. Others are more concrete like the utter agony of managing a cap table and preparing for board meetings.

Zenefits is tackling the latter with its newly released stock option management product. By integrating this functionality with the company’s existing HR information system, it has automated the issuance of these options at the time of employee on-boarding, as well as the ongoing management of vesting schedules and later option execution or reclaiming.

“A lot of the things we address are the things that I’ve personally hated dealing with in my role as founder and CEO of this and a previous company,” says Zenefits co-founder and CEO Parker Conrad. “Stock options is a huge headache. At my last company [SigFig], in the hour before board meetings my co-founder and I would say, ‘Oh shit, what are all the stock offers we’d made since our last board meeting?’ And then we’d go back through old emails to try to find all the offer letters we’d sent so we could get them approved at our board meeting. Generally, this is not what we wanted to focus on.”

When hiring a new employee, Zenefits allows management to simply enter stock option details like quantity, strike price, and vesting period into the web-based software platform which then in turn auto-populates offer letters and board approval documents – these docs are unique to each company but can be imported into the software – as well as updates all company-wide details like cap-tables and vesting schedules.

The stock option management module has been in a beta period for several weeks with a small number of existing Zenefits customers. One learning during that period, according to Conrad, is that startup legal docs are a lot more complex than his team originally expected, meaning the company had to update its software to accommodate more variation.

Not surprisingly, Zenefits uses its own software to manage its business. This proved fortuitous when the company was attempting to raise its recent, massive $66.5 million Series B funding round. Conrad and his management team were sitting in the offices of IVP, who ended up leading the round, negotiating terms of the when one of the investors asked the question, “How big is your stock option pool?”

“I logged into our Zenefits account right there in the meeting and told them the exact numbers,” Conrad says. “They were stunned and told us normally it takes a company two weeks to get that answer. We allow companies to view and manage this information in real-time.”

With Zenefits now managing even more sensitive company info – beyond even payroll and health insurance – security and privacy are of greater importance than ever. The company uses best in class AES-256 encryption on all data and takes other best-practice precautions like using HTTPS on all websites, hashing passwords, and running regular penetration tests, Conrad tells me.

Zenefits also allows companies to create multiple account administrators and set different permissions for each. For example, the person managing payroll may not have the authority to issue new equity options. The new stock option management feature was built with a simple workflow in mind, Conrad says. When new options are created within the system, the software sends an email to the company President – or attorney, if so designated – who legally must approve all newly issued options.

“This has been on our roadmap for a long time,” Conrad says. “This is one of the features that came from me and the list of things I hate to do, not so much from customer feedback. But this is the kind of thing that if you’re a founder or CFO is a universal pain point among all companies. They get it instantly.”

Stock option management is Zenefits’ first premium feature, and accordingly will cost $5 per month per options-holding employee. All existing features of the company’s HR platform remain free. The company collects fees on many of these services from benefit providers like insurance companies and software vendors. For example, it has grown to become the country’s largest reseller of Intuit payroll services, while also offering ZenPayroll and ADP, according to Conrad.

There are other solutions in the market for stock option administration, Conrad concedes, but these are more focused on accounting aspects like FAS 129 rules around valuation. Where Zenefits believes it's unique is in tying stock options to the rest of its HR suite, where the company already manages employee on-boarding and off-boarding, health insurance, benefits, payroll, and time off within a single online dashboard.

“These third-party systems often create more work, requiring you to type all this information into another system when hiring someone,” Conrad says. “We trying to help companies get to the point of one-button hiring. We do all the accounting and compliance work of someone like CapMX, but we make it much easier by automating all the paperwork and keeping the entire process in one place.”

Using Zenefits to manage your stock options has the potential to save companies a ton on legal fees, Conrad tells me. Top law firms would prefer not to do this type of rote administrative work anyway, he adds, explaining that his company has felt zero pushback from the legal industry upon automating what they previously had billed for. Zenefits describes the time and cost savings as turning what has been a multi-day process consisting of painful paper-pushing into a one-minute click-to-approve process.

Zenefits is geared toward small- and mid-sized businesses (SMBs) today, meaning those from two to 1,000 employees. “We aspire to be enterprise grade, but the truth is I don’t know pain points at huge companies,” Conrad says. “I understand how companies operate up to about 1,000 employees. And we already have tons of clients that are just hiring first employee.”

The hype in Silicon Valley around Zenefits has been otherworldly eve since the company was called the “fastest growing SaaS company in history” around the time of its June Series B. Since launching in January 2013, Zenefits has grown to more than 2,000 client companies with more than 50,000 employees, with management predicting 1,300 percent user and revenue growth in 2014.

Building out a scalable sales, customer support, and account management teams remains the company’s biggest challenge at this phase. But today’s announcement demonstrates that Conrad and his team are not taking their eye off the ball when it comes to product innovation either. There are no shortage of other pain points that the company hopes to address, he tells me.

With $84 million in the bank and growing buzz around its brand, it’s a good bet that Zenefits will be a fixture in the HR 2.0 world for quite a while. May no founder ever have to worry about stock option issuance again.

[Image via Adzuna]