startup equity standards - a guide for employees
DESCRIPTION
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?”TRANSCRIPT
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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