Five Areas of Startup Equity Awards Boards Should Discuss.

There are enough primers on the Internet. This is not a primer. But take it as a discussion guideline with your board, your lawyers, your executives.

Types of Equity Awards

Options

An option is a contract between a startup and an “optionee” (mostly employees, but could be contractors or board members) that provide a right to purchase a specified number of shares at a fixed price during a specified period of time. Options have a so-called “exercise price”, the price you have to pay during the option’s term. But you don’t have to exercise that right (for example if the shares decrease in value or if you don’t have enough cash to purchase the shares).

Restricted Stock

A plan that grants shares of a certain stock class for no cash consideration, or that are sold at a specific price, and that are subject to vesting restrictions. Unvested stock usually falls back to the company or can be repurchased by the company at cost. The stock is usually held in escrow until vested.

Restricted Stock Units

Restricted Stock usually holds the shares in escrow, while Restricted Stock Units promise to issue shares of a certain stock class in the event of future vesting. That means there is no way to transfer stock until the stock is vested AND settled (yes, these are two different events. For example, an employee can elect to defer settlement for a year for tax reasons).

Employee Stock Purchase Plans (ESPPs)

Eligible employees can purchase a certain stock class (usually Common), generally through payroll deduction. Technically, the participants are granted options at the beginning of a purchase period that are automatically exercised on the purchase date. They can have a discount to the fair-market-value of the stock at the beginning of the purchase period. The limit is $25,000 per person.

The problem with stock options and incentive plans

Steve Blank – April 10, 2019: Startup Stock Options – Why a good deal has gone bad.

Early Exercise of Stock Options

Stacy Crosnicker, Cooley: Early Exerciseable Stock Options: What you need to know.

Questions to Ask and Areas to Discuss

  1. Tax Treatment (examples: Incentive Stock Options (ISOs) versus Nonstatutory Stock Options (NSOs); limits of ISOs; 83(b) election at private versus public companies; RSUs and vesting, settlement, capital gains; tax withholdings of the company; share buy-backs to cover tax obligations)
  2. Accounting Considerations (examples: time-driven versus performance-driven awards; accounting values and summary compensation tables; non-employee compensatory equity valuation for compensation expenses)
  3. Grant of Equity Awards and Terms (examples: approval and award process; check for per-person aggregate limits; non-employee director award limits; grants before start dates and promises in offer letters; vesting and accounting principles; documentation of performance criteria, for example ‘adjusted revenue’; exercise price, discount options, and 409A;  process for exercising options)
  4. Sale of Shares Issued under Equity Awards (examples: insider trading laws; pro-rata rights for buy-backs or by investors; sale to whom — do they require information rights to confidential information?)
  5. Termination of Awards (examples: notices required; employment termination versus death or disability; approval process and timing should amendments become necessary for extensions)

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