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...

Read More

Corporate Finance & Securities

Employee Equity Compensation Plan: How to Slice the Pie?

Startup founders will often wonder how much employee equity they should give.  While there is no bright line rule for how to allocate equity in your equity compensation plan, there are a number of factors to consider to craft the appropriate equity compensation plan for your startup.

Types of equity to grant

Equity can be broken up into common stock and preferred stock. It’s unusual for a startup to issue preferred stock to anyone but an investor in the company, so we’ll focus on common stock. Common stock is a security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the...

Read More

Intellectual Property

Why Investors Require IP Assignments from Founders

One of the first requests that investors make before investing in a company is that the founders (and all key employees) execute written intellectual property assignment agreements. These agreements make it so any intellectual property that is created by the founder for the company will be owned by the company, not the founder individually. Generally, this request does not lead to much tension or pushback from the founders. Still, understanding the reason for IP assignments is important when negotiating your rights as a founder of the company.

Why Investors are Concerned About IP Assignments

The following hypothetical illustrates why investors are concerned with the company (as opposed to the founder) owning the IP associated with the company’s products or services.

Two founders, John...

Read More

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...

Read More

Corporate Finance & Securities

Issuing Restricted Stock to Founders

One of the common questions we hear from startups is whether the stock issued to the founders should be restricted. There are some important issues to consider when deciding whether to create a vesting schedule for founders. Today’s post highlights some of these issues and the main reasons for issuing restricted stock.

What is restricted stock? First things first, let’s explore what exactly restricted stock is. Restricted stock is stock that is subject to forfeiture to the company, either for compensation or for no additional compensation. Restricted stock is generally subject to forfeiture until the stock “vests” (see below for a discussion of vesting). For example, an early stage company may issue stock to its founders, but the founders are only entitled...

Read More

Business Startup

Who doesn’t like to save money? An overview of 83(b) Elections

For those of you who like to save money, here’s some info on 83(b) elections.

What is an 83(b) Election? Founders often receive restricted stock, which is stock that vests over time (for a refresher, check out our post on vesting). Section 83(b) allows founders to choose when they are taxed on restricted stock, either when they are granted rights to the stock or when the stock actually vests.

Section 83(a) of the Internal Revenue Code provides that founders will not recognize the value of stock until it vests. Usually delaying (and minimizing) taxes is a primary goal of tax planning. Under 83(a), founders would be required to recognize the value of the vesting stock at the time the stock vests, not at...

Read More

Business Startup

Key Term Sheet Provisions: Vesting

Why Vesting is Necessary Imagine this: three founders form a company, and three months into their venture they complete a round of financing with two major angel investors. The three founders each own 25% of the company’s issued stock, and the two investors each own 12.5% of the issued stock. In month four one of the three founders decides to quit working for the company. If there were no vesting provisions, that founder would walk away from the company with the same stock rights as the founders that continue to work for the company. The investors would also lose a key part of their investment. And the founder walking away could still prosper significantly if the company takes off.

How Vesting Works To...

Read More

Corporate Finance & Securities

Key Term Sheet Provisions

Within the context of angel investing and venture capital financing, you will often hear the phrase “term sheet” thrown around. A term sheet typically includes the conditions under which an angel investor or venture capital firm will finance a startup company. The term sheet outlines the material terms of a business agreement, but it is not a substitute for a proper agreement. Instead, it records the intentions of the parties to the transaction that will become a part of a future agreement. The term sheet is one of the first and most important documents that will help to define the relationship between investor and entrepreneur. Important term sheet provisions include: liquidation preference, participation, drag along agreements, antidilution, conversion, and many...

Read More

146 N Canal Street, Suite 350   |   team@invigorlaw.com