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
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...
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...
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...
Difference between consultants and employees
A consultant (also called an independent contractor) is an expert in a particular field who is in the business of providing companies with his or her professional services. Consultants generally set their own hours, use their own equipment (e.g., as opposed to a company-issued laptop) and are not subject to the direction or control of the company to which they provide services. Every state has its own rules to determine whether a person is an employee or a consultant. In Massachusetts, for example, a consultant must perform services that are “outside the usual course of business” of a company. It is extremely difficult for an individual to satisfy the stringent tests to be properly classified as a consultant in Massachusetts (and some other states as well), and there is a presumption that any person who provides services to another is an employee. If these factors (and others showing a consultant’s independence) are not satisfied, an individual will be deemed an employee. Read More...
How startups compensate employees
All employees (including founders) must be paid in cash in amounts at least to satisfy the minimum wage laws established by federal and state laws. Many founders opt to go without compensation in the initial stages, but technically doing so is in violation of the federal and state wages laws. Employees may receive equity in addition to cash payments, but due to tax and other complexities it is generally not feasible to them equity in lieu of minimum cash wages. Although the market may reflect standard salaries for different types of positions, there is no requirement that employees receive any more than minimum wage, and the wages employees receive often depend on how large and established their employer is. Read More...
Foreign employees and their need for a 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...
Unpaid interns
You can’t avoid the wage and hour laws for employees by simply characterizing your workers as “interns”. The laws of each state vary, but in general, to properly classify a person as intern, the person must be a student or trainee, the focus of the internship must be on training the intern, and the company must not derive any immediate advantage from retaining the intern (must be similar to training given in an educational environment). An individual’s ability to receive school credit for the internship is helpful, although not determinative in all cases. If the person does not qualify as an unpaid intern and should instead be classified as an employee, then the person needs to be paid wages in accordance with federal and state laws, and be covered by unemployment and workers’ compensation insurance.
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. In some states, such as California, non-competes are not generally enforceable (other than in the context of a sale of the company). And as of October 1, 2018, Massachusetts significantly restricted the use of non-competes. In most states, however, they are enforceable if they are reasonable in scope. Read More...
Reserving shares under the company’s option plan
The “pool” represents the number of shares the company sets aside in reserve under its plan to compensate its employees, consultants, advisors and directors. The size of the pool depends on the company’s stage, circumstances and hiring needs. When the company issues shares under the plan, it dilutes the ownership percentage of the other shareholders proportionately. However, any shares reserved under the plan that are not used (i.e., that are not sold or issued by the company) do not dilute the actual ownership of the other shareholders. Therefore, the size of the pool at the initial formation of the company doesn’t really matter all that much—if the pool is too small and you need more shares, it can always be increased; if the pool is larger than you actually need, any excess shares don’t have any negative impact on the actual ownership of the company. Most will initially reserve an pool that is big enough to provide for the equity incentives needed to cover their anticipated hiring needs for the first six months to a year. Read More...
Agreements with employees
Every employee of the company should have a standard letter that sets forth the general terms and conditions of their employment and states that they are “at-will” employees. This means that they can leave the company at any time (although their rights to retain their shares or exercise their will depend on the vesting terms), and also that the company can terminate their employment at any time—with or without cause. They should also sign an agreement with the company where they agree to keep the company’s information confidential, assign their rights to any developed intellectual property to the company and, in most states, agree not to compete with the company for a period of time following their employment. Read More...
Hiring a team before securing funding
It is almost unheard of that an entire team would be in place before securing a first round of funding. In fact, the primary use of a first round of outside capital is often to hire additional team . The network and reputation that your future investors bring to the table can also be tremendously useful when recruiting new hires. Many entrepreneurs find that they are able to recruit more talented team (and without giving up as much equity) after securing funding from strong investors. 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
- 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
- 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
