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?”

1. GOLD STANDARD
A GUIDE FOR EMPLOYEES
STARTUP EQUITY

2. MARY RUSSELL
STOCK OPTION COUNSEL
LEGAL SERVICES FOR INDIVIDUALS
Attorney
Stock Option Counsel
Palo Alto, California
WWW.STOCKOPTIONCOUNSEL.COM

3. Not all companies are startups
So not all employee equity is
Startup Equity

4. Stock is made by lawyers
So the devil is in the details

5. Not all employees have lawyers
So they don’t know if they have
Startup Equity

6. So one lawyer lays down the law
How to know if you have
Startup Equity

7. Three Standards
Startup Equity is …

8. 1. Ownership
2. Risk/Reward
3. Tax Benefits

9. 1. Ownership

10. No take backs
If you own Startup Equity, you get to
keep vested shares when you leave
the company

11. Options must be exercised
But once you exercise vested options
or vest restricted stock, with Startup
Equity you own the shares

12. Take backs?
Watch out for “Repurchase Rights” for
vested shares. If the company can
repurchase your vested shares, you
don’t own them

13. 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

14. How do you know?
You ask: “Can the company take back
my vested shares?”

15. 2. Risk/Reward

16. 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

17. But your risk is rewarded
You should receive enough shares of
Startup Equity to reward the risk you
take

18. How much is enough?
Good question

19. How do you know?
You ask the company: “What
information can you provide to help
me evaluate the offer?”

20. What can I ask?
Startup Equity must reward risk. Ask
what you need to know to
understand your potential reward

21. But go gently
Companies are sensitive about
sharing capitalization and valuation
information

22. 3. Tax Benefits
Startup Equity 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 has tax benefits
Opportunities for:
Capital Gains Tax Rates
No Payroll Taxes
Taxes Deferred Until Sale of Stock

25. But only …
If the company designs their
employee equity as Startup Equity

26. How do they do it?
The Tax Code has special rules to
help employees who have Startup
Equity. Really. Just for you

27. *Tax benefit examples*
Restricted Stock + 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 employee equity …
May be taxed as cash compensation
and also require taxes to be paid
before you can sell the shares

29. So how do you 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’t know …
It’s not Startup Equity

32. So ask the company …

33. 1. Ownership
Can the company take back my vested shares?

34. 2. Risk/Reward
What information can you provide to help me
evaluate the offer?

35. 3. Tax Benefits
Is this equity designed for
capital gains tax rates and tax deferral?

36. Who can help?
STOCK OPTION 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. Please share
Thanks!