Startup Equity Standards - A Guide for Employees
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Learn the three standards that define startup employee equity and three questions to ask to make sure you have the real thing. 1. Ownership - “Can the company take back my vested shares?” 2. Risk/Reward - “What information can you provide to help me evaluate the offer?” 3. Tax Benefits - “Is this equity designed for capital gains tax rates and tax deferral?”
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Startup Equity Standards - A Guide for Employees
- 1. GOLD STANDARD A GUIDE FOR EMPLOYEES STARTUP EQUITY
- 2. MARY RUSSELL STOCK OPTION COUNSEL LEGAL SERVICES FOR INDIVIDUALS Attorney Stock Option Counsel Palo Alto, California WWW.STOCKOPTIONCOUNSEL.COM
- 3. Not all companies are startups So not all employee equity is Startup Equity
- 4. Stock is made by lawyers So the devil is in the details
- 5. Not all employees have lawyers So they don’t know if they have Startup Equity
- 6. So one lawyer lays down the law How to know if you have Startup Equity
- 7. Three Standards Startup Equity is …
- 8. 1. Ownership 2. Risk/Reward 3. Tax Benefits
- 9. 1. Ownership
- 10. No take backs If you own Startup Equity, you get to keep vested shares when you leave the company
- 11. Options must be exercised But once you exercise vested options or vest restricted stock, with Startup Equity you own the shares
- 12. Take backs? Watch out for “Repurchase Rights” for vested shares. If the company can repurchase your vested shares, you don’t own them
- 13. Who would do that? The worst example was Skype. But it’s becoming more common in companies who offer equity that’s not really Startup Equity
- 14. How do you know? You ask: “Can the company take back my vested shares?”
- 15. 2. Risk/Reward
- 16. Startup Equity has no set value So if you accept Startup Equity in place of cash compensation or job security, you are taking a risk
- 17. But your risk is rewarded You should receive enough shares of Startup Equity to reward the risk you take
- 18. How much is enough? Good question
- 19. How do you know? You ask the company: “What information can you provide to help me evaluate the offer?”
- 20. What can I ask? Startup Equity must reward risk. Ask what you need to know to understand your potential reward
- 21. But go gently Companies are sensitive about sharing capitalization and valuation information
- 22. 3. Tax Benefits Startup Equity means investor-type tax benefits, not cash compensation taxes
- 23. Cash compensation = high taxes Ordinary Income Tax Rates + Payroll Taxes + Immediate Taxation
- 24. Startup Equity has tax benefits Opportunities for: Capital Gains Tax Rates No Payroll Taxes Taxes Deferred Until Sale of Stock
- 25. But only … If the company designs their employee equity as Startup Equity
- 26. How do they do it? The Tax Code has special rules to help employees who have Startup Equity. Really. Just for you
- 27. *Tax benefit examples* Restricted Stock + 83(b) election Early Exercise NQSO + 83(b) election Incentive Stock Options *Ask your tax advisor what would be best for you. This is complicated.*
- 28. But other employee equity … May be taxed as cash compensation and also require taxes to be paid before you can sell the shares
- 29. So how do you know? You ask: “Is this equity designed for capital gains tax rates and tax deferral?”
- 30. Review: Startup Equity = 1. Ownership 2. Risk/Reward 3. Tax Benefits
- 31. If you don’t know … It’s not Startup Equity
- 32. So ask the company …
- 33. 1. Ownership Can the company take back my vested shares?
- 34. 2. Risk/Reward What information can you provide to help me evaluate the offer?
- 35. 3. Tax Benefits Is this equity designed for capital gains tax rates and tax deferral?
- 36. Who can help? STOCK OPTION COUNSEL LEGAL SERVICES FOR INDIVIDUALS WWW.STOCKOPTIONCOUNSEL.COM Mary Russell, Attorney Stock Option Counsel 125 University Avenue, Suite 220 Palo Alto, California 94301 (650) 326-3412