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GOLD STANDARDA GUIDE FOR EMPLOYEES
STARTUP EQUITY
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MARY RUSSELL
STOCK OPTION COUNSELLEGAL SERVICES FOR INDIVIDUALS
AttorneyStock Option CounselPalo Alto, California
WWW.STOCKOPTIONCOUNSEL.COM
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Not all companies are startups
So not all employee equity is Startup Equity
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Stock is made by lawyers
So the devil is in the details
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Not all employees have lawyers
So they don’t know if they haveStartup Equity
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So one lawyer lays down the law
How to know if you haveStartup Equity
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Three Standards
Startup Equity is …
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1. Ownership
2. Risk/Reward
3. Tax Benefits
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1. Ownership
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No take backs
If you own Startup Equity, you get to keep vested shares when you leave
the company
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Options must be exercised
But once you exercise vested options or vest restricted stock, with Startup
Equity you own the shares
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Take backs?
Watch out for “Repurchase Rights” for vested shares. If the company can
repurchase your vested shares, you don’t own them
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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
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How do you know?
You ask: “Can the company take back my vested shares?”
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2. Risk/Reward
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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
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But your risk is rewarded
You should receive enough shares of Startup Equity to reward the risk you
take
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How much is enough?
Good question
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How do you know?
You ask the company: “What information can you provide to help
me evaluate the offer?”
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What can I ask?
Startup Equity must reward risk. Ask what you need to know to
understand your potential reward
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But go gently
Companies are sensitive about sharing capitalization and valuation
information
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3. Tax Benefits
Startup Equity means investor-type tax benefits,
not cash compensation taxes
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Cash compensation = high taxes
Ordinary Income Tax Rates +Payroll Taxes +
Immediate Taxation
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Startup Equity has tax benefits
Opportunities for:Capital Gains Tax Rates
No Payroll TaxesTaxes Deferred Until Sale of Stock
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But only …
If the company designs their employee equity as Startup Equity
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How do they do it?
The Tax Code has special rules to help employees who have Startup Equity.
Really. Just for you
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*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.*
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But other employee equity …
May be taxed as cash compensation and also require taxes to be paid
before you can sell the shares
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So how do you know?
You ask: “Is this equity designed for capital gains tax rates and tax
deferral?”
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Review: Startup Equity =
1. Ownership2. Risk/Reward3. Tax Benefits
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If you don’t know …
It’s not Startup Equity
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So ask the company …
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1. Ownership
Can the company take back my vested shares?
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2. Risk/Reward
What information can you provide to help me evaluate the offer?
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3. Tax Benefits
Is this equity designed for capital gains tax rates and tax deferral?
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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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