The High-touch Legal Services® Blog…for Startups!
© 2009-2020 Dana H. Shultz, Attorney at Law
As I write this post, I am in the process of helping an early-stage client develop a stock-based compensation plan for a key officer. The principal choice was between a stock option and restricted stock.
A stock option is the right to purchase a specified number of shares at a specified price at some point in the future. The option typically “vests” over a period of years. The longer the individual stays with the company, the greater the portion of the option s/he has the right to exercise. At the end of the vesting period, the individual has the right to purchase all of the shares specified in the option.
With restricted stock, shares are granted to the individual immediately but are subject to “reverse vesting”. If the individual leaves the company, a specified portion of the stock is forfeited to the company, if the individual paid nothing for the shares. Or it is subject to repurchase by the company at the price the individual paid. The portion that is subject to forfeiture or repurchase declines to zero over a specified number of years.
When restricted stock is granted, the recipient signs, in addition to a stock purchase agreement, a Stock Assignment Separate from Certificate. If, when the individual leaves, some shares remain unvested, the company at that time fills in the number of unvested shares, which then are forfeited or repurchased.
Many companies are choosing restricted stock over stock options, and that was the choice my client made.
Whatever form of stock-based compensation is selected, both the company and the individual should consult with their tax advisers before the grant takes place.
Photo credit: Michelle Meiklejohn
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
1/17/2010 | 3:23 pm Permalink
Hi Dana, I’m curious too about “gifting” stock as a bonus. Setting up the employee rewards program with stocks as a bonus. I’ve working in larger corps – but never had stocks as an option so I don’t know how this works. Now that I’m starting a new company – with the intent to grow to 5 locations – I’m doing a bit of research on this while I’m working on the funding. ( mostly refinancing a property to open the first phase of my culinary marketplace.) Are there other postings that I should be reading?
1/18/2010 | 11:52 am Permalink
From your description, it appears that you will want to implement a tax-qualified stock option plan. If you search the Web for “incentive stock option”, you will find a great deal of information on this topic.
[…] Rewarding Key Personnel: Restricted Stock or Options? […]
How to establish a company with international team?…
Assuming that you are talking about a corporation formed in the U.S., yes, you can grant stock options to foreign team members. In my experience, however, startups nowadays grant restricted stock more often than options. The reasons for this are explai…
What are some standard structures for compensating web programmers in equity at the very start of a start-up?…
In my opinion, whatever the programmer develops for the company, and all intellectual property rights therein, should be assigned to the company, irrespective of whether he later takes an equity stake in the company. Absent such an assignment, the comp…
What stock option plan should a startup have?…
Most of my clients don’t implement a stock option plan (and those that do implement such a plan don’t do so on day one). The reason: Restricted stock requires lower up-front and ongoing costs and administrative overhead than stock options. Additional…
Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.
For more information about Dana and his services, please go to the About Dana Shultz page and the Legal Services page.
+1 510 547-0545
dana [at] danashultz [dot] com
This blog does not constitute legal advice and does not establish an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
This website is a "communication" as that term is defined in Rule of Professional Conduct 1-400(A) (now subject to Chapter 7 of the Rules of Professional Conduct that took effect on November 1, 2018).
Source: Google Analytics December 20, 2019
©2020 The High-touch Legal Services® Blog…for Startups!
Powered by WordPress using the Luxury theme