Allocating equity among founders
Vesting restrictions on shares held by the founders
Vesting terms that make sense
Accelerating vesting on a sale or termination
Tax implications related to shares that vest
Rules for foreign founders in the US on a student visa
Who owns your IP
Non-competes with former employers
Take a good idea with you when you leave a company
Retaining a license to your IP
Founder compensation
Founder employment agreements
Allocating equity among founders
Equity allocation discussions among founders can be emotional and difficult, but it is critical to have an honest and robust discussion about founder equity early. Allocating too little equity to a founder whose role will be key to the venture creates an obvious challenge. However, allocating too much equity to a founder whose ultimate contributions will be less significant than others can have equally devastating consequences, as doing so has the tendency to create a lot of ill will among the other founders over time (“I have more responsibility than he does, so it isn’t fair that he has the same ownership stake as me”). So it’s important to think through these allocations very carefully. Read More...
Vesting restrictions on shares held by the founders
Founders should put vesting restrictions on their shares. “Vesting” means that you need to “earn” your shares before you are allowed to keep them if you leave the company. Investors will insist that the founders’ shares are subject to vesting, because it is important that the team they are investing in is motivated to stay with, and build value in, the company. Read More...
Vesting terms that make sense
Equity is often the primary financial motivation for taking risk in a new venture. To be a proper incentive, the reward of equity should be tied to each person’s contribution to the success of the venture. In an ideal world this would mean milestone-based vesting over several years. However, the reality is that few can predict what milestones will be most important beyond a few months in advance with any accuracy, and therefore most equity award vesting is time-based. Shares held by founders typically vest over a four- to five-year period on a monthly or quarterly basis. Most non-founder employees vest over a four- to five-year period with a one-year cliff (25% vests after the first year) and monthly or quarterly vesting thereafter for the remaining three or four years. The cliff period gives the company time to determine whether the employee is working out before the person gets to keep any of his or her shares. Sometimes founders’ shares do not have a cliff. Read More...
Accelerating vesting on a sale or termination
You may want the vesting of your shares to accelerate if you are fired or the company is sold. Is that a good idea? Will your investors agree to this? Read More...
Tax implications related to shares that vest
If your shares are subject to vesting, how and when you are taxed on those “restricted shares” is governed by Section 83 of the Internal Revenue Code. Specifically, the tax consequences depend upon whether you make an election—known as a “”—under Section 83 or not. Read More...
Rules for foreign founders in the US on a student visa
A foreign student is permitted to own equity in a company and to serve on the of a company. A foreign student may not perform work for a company without obtaining appropriate authorization from the foreign student office at his/her university. The rules are no different for “founders." Read More...
Who owns your IP
To successfully launch a new , the company needs to own, or have a license to use, the intellectual property that will be used in the business. This aggregation of IP does not happen automatically and requires careful planning with your legal counsel. Read More...
Non-competes with former employers
Non-competition agreements may be enforceable, depending on the state in which the employee lived and worked when the agreement was signed, the consideration (value) given in exchange for the agreement and the reasonableness of the restrictions in the agreement. Read More...
Take a good idea with you when you leave a company
Even if you finish conceiving of or developing your idea after quitting your job, your employer could still own the rights to your idea. You should have an employment attorney review your current employment contract to determine any rights your employer may have in your idea. Read More...
Retaining a license to your IP
It may seem logical and fair that the founders contributing IP they invented to launch a new should retain a license to that IP should the company fail or should the founders identify other uses for the IP outside those contemplated by the company. After all, the founders developed the idea and invented the IP prior to forming the company. Read More...
Founder compensation
Although this is ultimately a state law issue, founders are typically deemed to be “employees” who must therefore be paid at least minimum wages just like other employees in accordance with federal and state laws.
Founder employment agreements
Founders of technology-based and life sciences do not generally enter into “employment agreements” with their companies. Employment agreements typically provide the employee with rights to severance and other employment-related protections. Because of the large equity stake the founders have in the company and the importance of cash to a startup, investors will generally not agree to provide contractual severance rights to founders. Read More...
Select Additional Topics
- The right time to incorporate
- Determining the right type of entity to create
- Where to incorporate
- Defining “qualified to do business” and where to be qualified
- Who makes decisions for the company?
- How startups compensate employees
- Foreign employees and their need for a visa
- Who owns your IP
- Licensing IP from a university or hospital
- Retaining a license to your IP
- Non-competes with former employers
- Reserving shares under the company’s option plan
- Accelerating vesting on a sale or termination
- Vesting terms that make sense
- Tax implications related to shares that vest
- Difference between consultants and employees
- How startups compensate employees
- Foreign employees and their need for a visa
- Unpaid interns
- Non-competes with former employers
- Reserving shares under the company’s option plan
- Agreements with employees
- Hiring a team before securing funding
- Vesting restrictions on shares held by the founders
- Accelerating vesting on a sale or termination
- Vesting terms that make sense
- Tax implications related to shares that vest
- Difference between options and restricted stock
- Tax differences between ISOs and NSOs
- Granting options vs. issuing restricted stock
- Advisory board setup and compensation
- Reserving shares under the company's option plan
