Corporate Finance & Securities

Employee Equity Explained: Stock Options

Today, we are continuing our series on Employee Equity Explained by discussing stock options specifically.

Stock options are contracts that allow an employee to buy shares (this is called “exercising” the option) at a fixed price. Options are different than receiving stock because an option is exactly as it sounds; it’s an option to buy stock upon certain conditions being met, such as vesting (discussed below).

There are two standard types of stock options: Incentive Stock Options (“ISOs”) and Nonstatutory Stock Options (“NSOs”).

ISOs provide the recipient with certain tax benefits but they can only be provided to employees of the company, not independent contractors or non-employee board members. Additionally, only $100,000 in ISOs can be exercisable in any given year. NSOs on...

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Corporate Finance & Securities

What is a Cap Table?

A cap table (or capitalization table) is a spreadsheet listing all of your company’s securities (stock, options, etc.) and who owns those securities. Cap tables provide a basic look into the “total pie” and each shareholder and option holder’s piece of that pie (basically who owns what). More detailed cap tables will include formulas that allow the company to model future transactions. 

There’s no one-size-fits-all way to structure your cap table. Some provide only a general summary of the breakdown of ownership in a company, while others include extensive details about the individual holder, the type of securities held, issue dates, ownership percentages on a fully diluted basis, and other granular details.

When’s the Right Time to Build a Cap Table?

It’s relatively...

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Corporate Finance & Securities

Things to Know When Bringing on Startup Advisors

Startup advisors can be an extremely valuable resource for early-stage companies. Typically advisors bring startup experience, a large network of entrepreneurs, investors and other types of advisors, and sound business advice for growing your company. In today’s post, we’ve highlighted some of the key considerations to have in mind when considering hiring advisors for your startup:

Are They the Right Fit?

Perhaps the most important consideration is finding a person that understands your business and goals and finding someone that has industry experience and contacts that you can leverage strategically for the benefit of your business. They should also be someone you trust and that you know will give you reliable advice. It also helps if you get along with and enjoy...

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Corporate Finance & Securities

How the Option Pool Impacts Valuation in Startup Financing

Many startups ask us about reserving an option “pool.” The “option pool” is a reserve of authorized but unissued shares of stock that the founders intend to use to compensate future key employees and investors. There is no size of option pool that is right for every company, although you’ve probably read that a “standard” option pool is generally somewhere between 10-20%. Many founders aren’t terribly concerned with the exact size of the option pool, although we think they should be. The size of the option pool has a considerable impact on the valuation of a startup when it raises capital from investors and ultimately the amount of dilution to founders’ shares.

Pre-money Valuation and Option Pools

As we’ve discussed in our...

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Corporate Finance & Securities

Founders, Stock, and Dilution

Successful Founders Get Diluted.

We often get asked by founders what they can do to protect against dilution. A few answers:

You can build a crap company nobody wants to invest in. You can build a cool company that doesn’t need to scale. You can pour your own money into the venture, if you have enough of it. You can scale at a slow pace. You might be able to get a loan instead of raising money through selling an interest in your company.

There are some small protections against dilution that your attorneys can fashion for you. But the reality of life for most founders of ventures designed to scale is that dilution is a normal part of success. Many founders are strongly opposed to dilution,...

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Business Startup

Why Do Startup Companies Use Vesting Schedules for Founders?

As a startup founder, you’ve probably heard that your startup’s shares should be subject to a vesting schedule. You may not know why a vesting schedule is important when issuing startup founders’ shares. Today’s post highlights some of the major reasons why a vesting schedule makes sense for most startup companies, including why investors prefer investing in companies that use vesting schedules when issuing stock to the founders.

An  example of why startup companies use vesting schedules for founders Suppose ABC Company was founded by John and Jane. ABC has created a new crowdfunding portal where investors can invest in businesses online. ABC raised a small friends and family round of investment to help launch the company. John and Jane have been...

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Business Startup

Deferred Compensation

Deferred compensation is compensation to employees or independent contractors that is paid after the income is earned. Examples of deferred compensation include stock options, retirement plans, agreements to defer salary or bonuses, severance agreements, and deferred payments in connection with covenants not to compete.

Qualified Deferred Compensation Plans Under qualified deferred compensation plans, contributions by employers are not taxed to the employees at the time of the contribution. The full amount of the untaxed contribution can be invested. Employers get an immediate deduction for contributions to qualified plans, even though the employee is not taxed at that time. Eventually benefits from qualified plans are distributed, and are generally subject to taxation at this point. However, distributions can be “rolled over” to IRA’s...

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Business Startup

Incentive Stock Option Basics

If you’re looking for a way to incentivize employee performance in your company without having to hand out hefty salaries and bonuses, you may want to consider incentive stock options (ISOs). Often referred to as qualified (or statutory) stock options, ISOs are a type of employee stock option that provide employees with non-cash compensation in the form of stock options. Today’s post will examine some of the key features of ISOs, as well as the basic requirements to be a qualified ISO.

Tax Benefits of Using ISOs Perhaps the most significant benefit, especially from the employee’s perspective, of using ISOs is the tax benefit. An employee who exercises the option to purchase stock does not have to pay ordinary income tax on...

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