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Startup Equity Standards - A Guide for Employees
The document serves as a guide for employees regarding startup equity, highlighting three key standards: ownership, risk/reward, and tax benefits. It emphasizes the importance of understanding equity terms and encourages employees to ask specific questions to ensure they hold true startup equity rather than other forms of employee equity that may not have the same advantages. The guide recommends consulting with a tax advisor to navigate the complexities of equity compensation and taxation.
Startup Equity Standards - A Guide for Employees
- 1. GOLD STANDARD A GUIDEFOR EMPLOYEES STARTUP EQUITY
- 2. MARY RUSSELL STOCK OPTIONCOUNSEL LEGAL SERVICES FOR INDIVIDUALS Attorney Stock Option Counsel Palo Alto, California WWW.STOCKOPTIONCOUNSEL.COM
- 3. Not all companiesare startups So not all employee equity is Startup Equity
- 4. Stock is madeby lawyers So the devil is in the details
- 5. Not all employeeshave lawyers So they don’t know if they have Startup Equity
- 6. So one lawyerlays down the law How to know if you have Startup Equity
- 7.
- 8. 1. Ownership 2. Risk/Reward 3.Tax Benefits
- 9.
- 10. No take backs Ifyou own Startup Equity, you get to keep vested shares when you leave the company
- 11. Options must beexercised But once you exercise vested options or vest restricted stock, with Startup Equity you own the shares
- 12. Take backs? Watch outfor “Repurchase Rights” for vested shares. If the company can repurchase your vested shares, you don’t own them
- 13. Who would dothat? 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 youknow? You ask: “Can the company take back my vested shares?”
- 15.
- 16. Startup Equity hasno set value So if you accept Startup Equity in place of cash compensation or job security, you are taking a risk
- 17. But your riskis rewarded You should receive enough shares of Startup Equity to reward the risk you take
- 18. How much isenough? Good question
- 19. How do youknow? You ask the company: “What information can you provide to help me evaluate the offer?”
- 20. What can Iask? Startup Equity must reward risk. Ask what you need to know to understand your potential reward
- 21. But go gently Companiesare sensitive about sharing capitalization and valuation information
- 22. 3. Tax Benefits StartupEquity 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 hastax benefits Opportunities for: Capital Gains Tax Rates No Payroll Taxes Taxes Deferred Until Sale of Stock
- 25. But only … Ifthe company designs their employee equity as Startup Equity
- 26. How do theydo it? The Tax Code has special rules to help employees who have Startup Equity. Really. Just for you
- 27. *Tax benefit examples* RestrictedStock + 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 employeeequity … May be taxed as cash compensation and also require taxes to be paid before you can sell the shares
- 29. So how doyou 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’tknow … It’s not Startup Equity
- 32. So ask thecompany …
- 33. 1. Ownership Can thecompany take back my vested shares?
- 34. 2. Risk/Reward What informationcan you provide to help me evaluate the offer?
- 35. 3. Tax Benefits Isthis equity designed for capital gains tax rates and tax deferral?
- 36. Who can help? STOCKOPTION 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
- 37.