startup equity standards - a guide for employees

GOLD STANDARDA GUIDE FOR EMPLOYEES

STARTUP EQUITY

MARY RUSSELL

STOCK OPTION COUNSELLEGAL SERVICES FOR INDIVIDUALS

AttorneyStock Option CounselPalo Alto, California

WWW.STOCKOPTIONCOUNSEL.COM

Not all companies are startups

So not all employee equity is Startup Equity

Stock is made by lawyers

So the devil is in the details

Not all employees have lawyers

So they don’t know if they haveStartup Equity

So one lawyer lays down the law

How to know if you haveStartup Equity

Three Standards

Startup Equity is …

1. Ownership

2. Risk/Reward

3. Tax Benefits

1. Ownership

No take backs

If you own Startup Equity, you get to keep vested shares when you leave

the company

Options must be exercised

But once you exercise vested options or vest restricted stock, with Startup

Equity you own the shares

Take backs?

Watch out for “Repurchase Rights” for vested shares. If the company can

repurchase your vested shares, you don’t own them

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

How do you know?

You ask: “Can the company take back my vested shares?”

2. Risk/Reward

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

But your risk is rewarded

You should receive enough shares of Startup Equity to reward the risk you

take

How much is enough?

Good question

How do you know?

You ask the company: “What information can you provide to help

me evaluate the offer?”

What can I ask?

Startup Equity must reward risk. Ask what you need to know to

understand your potential reward

But go gently

Companies are sensitive about sharing capitalization and valuation

information

3. Tax Benefits

Startup Equity means investor-type tax benefits,

not cash compensation taxes

Cash compensation = high taxes

Ordinary Income Tax Rates +Payroll Taxes +

Immediate Taxation

Startup Equity has tax benefits

Opportunities for:Capital Gains Tax Rates

No Payroll TaxesTaxes Deferred Until Sale of Stock

But only …

If the company designs their employee equity as Startup Equity

How do they do it?

The Tax Code has special rules to help employees who have Startup Equity.

Really. Just for you

*Tax benefit examples*

Restricted Stock + 83(b) electionEarly Exercise NQSO + 83(b) election

Incentive Stock Options

*Ask your tax advisor what would be best for you. This is complicated.*

But other employee equity …

May be taxed as cash compensation and also require taxes to be paid

before you can sell the shares

So how do you know?

You ask: “Is this equity designed for capital gains tax rates and tax

deferral?”

Review: Startup Equity =

1. Ownership2. Risk/Reward3. Tax Benefits

If you don’t know …

It’s not Startup Equity

So ask the company …

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?

Who can help?

STOCK OPTION COUNSELLEGAL SERVICES FOR INDIVIDUALS

WWW.STOCKOPTIONCOUNSEL.COM

Mary Russell, AttorneyStock Option Counsel

125 University Avenue, Suite 220Palo Alto, California 94301

(650) 326-3412

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