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GOLD STANDARD
A GUIDE FOR EMPLOYEES
STARTUP EQUITY
MARY RUSSELL
STOCK OPTION COUNSEL
LEGAL SERVICES FOR INDIVIDUALS
Attorney
Stock Option Counsel
Palo Alto, California
WWW.S...
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 have
Startup Equity
So one lawyer lays down the law
How to know if you have
Startup 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 s...
Take backs?
Watch out for “Repurchase Rights” for
vested shares. If the company can
repurchase your vested shares, you
don...
Who would do that?
The worst example was Skype. But it’s
becoming more common in companies
who offer equity that’s not rea...
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 tak...
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 Taxes
Taxes Deferred Until Sale of S...
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) election
Early Exercise NQSO + 83(b) election
Incentive Stock Options
*Ask...
But other employee equity …
May be taxed as cash compensation
and also require taxes to be paid
before you can sell the sh...
So how do you know?
You ask: “Is this equity designed for
capital gains tax rates and tax
deferral?”
Review: Startup Equity =
1. Ownership
2. Risk/Reward
3. 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 COUNSEL
LEGAL SERVICES FOR INDIVIDUALS
WWW.STOCKOPTIONCOUNSEL.COM
Mary Russell, Attorney
Stock ...
Please share
Thanks!
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Startup Equity Standards - A Guide for Employees

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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?”

Startup Equity Standards - A Guide for Employees

  1. 1. GOLD STANDARD A GUIDE FOR EMPLOYEES STARTUP EQUITY
  2. 2. MARY RUSSELL STOCK OPTION COUNSEL LEGAL SERVICES FOR INDIVIDUALS Attorney Stock Option Counsel Palo Alto, California WWW.STOCKOPTIONCOUNSEL.COM
  3. 3. Not all companies are startups So not all employee equity is Startup Equity
  4. 4. Stock is made by lawyers So the devil is in the details
  5. 5. Not all employees have lawyers So they don’t know if they have Startup Equity
  6. 6. So one lawyer lays down the law How to know if you have Startup Equity
  7. 7. Three Standards Startup Equity is …
  8. 8. 1. Ownership 2. Risk/Reward 3. Tax Benefits
  9. 9. 1. Ownership
  10. 10. No take backs If you own Startup Equity, you get to keep vested shares when you leave the company
  11. 11. Options must be exercised But once you exercise vested options or vest restricted stock, with Startup Equity you own the shares
  12. 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. 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. 14. How do you know? You ask: “Can the company take back my vested shares?”
  15. 15. 2. Risk/Reward
  16. 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. 17. But your risk is rewarded You should receive enough shares of Startup Equity to reward the risk you take
  18. 18. How much is enough? Good question
  19. 19. How do you know? You ask the company: “What information can you provide to help me evaluate the offer?”
  20. 20. What can I ask? Startup Equity must reward risk. Ask what you need to know to understand your potential reward
  21. 21. But go gently Companies are sensitive about sharing capitalization and valuation information
  22. 22. 3. Tax Benefits Startup Equity means investor-type tax benefits, not cash compensation taxes
  23. 23. Cash compensation = high taxes Ordinary Income Tax Rates + Payroll Taxes + Immediate Taxation
  24. 24. Startup Equity has tax benefits Opportunities for: Capital Gains Tax Rates No Payroll Taxes Taxes Deferred Until Sale of Stock
  25. 25. But only … If the company designs their employee equity as Startup Equity
  26. 26. How do they do it? The Tax Code has special rules to help employees who have Startup Equity. Really. Just for you
  27. 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. 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. 29. So how do you know? You ask: “Is this equity designed for capital gains tax rates and tax deferral?”
  30. 30. Review: Startup Equity = 1. Ownership 2. Risk/Reward 3. Tax Benefits
  31. 31. If you don’t know … It’s not Startup Equity
  32. 32. So ask the company …
  33. 33. 1. Ownership Can the company take back my vested shares?
  34. 34. 2. Risk/Reward What information can you provide to help me evaluate the offer?
  35. 35. 3. Tax Benefits Is this equity designed for capital gains tax rates and tax deferral?
  36. 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. 37. Please share Thanks!

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