I am part of a startup corporation as an investor. Out of a group of 12 investors, 5 of us are also working very hard, dedicating personal time to building this company. Likewise we are doing this without pay and are intested in some sort of stock options to offset the time spent. What are the considerations I should be aware of in requesting these, and how might these options bring about a tax obligation...what is best?
The best thing is to speak with an attorney. You have a couple of complicated issues here and if you want to protect your interests you need to act now. It sounds like you invested and invested time. If you are actively participating in management, that may resolve some possible securities issues. It does not, however, possibly resolve wage issues. The next matter facing this startup is if the the company complied with securities laws. If they did not, this may be a ticking time bomb.
As to you, you did not say what agreements you have to reflect your investment or your work. Were you issued shares at all? Did you sign a shareholder agreement? Were you given an offer letter? An assignment agreement? What exactly?
As to how to request these, the board of directors has the authority to approve and ultimately grant options or other equity. So you can speak with the board directly about this proposal. You then get the other complicated issue. It does not sound like you are really an employee so ISOs may be out. You may only qualify for NQOs. In the alternative to those the corporation could structure phantom stock or other ideas. The options are many. Each has complicated legal and tax issues that need to handled by an attorney.
So, you should hire a business attorney now and see if your interest is protected. If not, how to get it protected and how to reflect your participation in this venture. Try to do this venture without legal help will be a quick road to ruin and the courthouse. Good luck.
This answer is for informational purposes only and is not legal advice regarding your question and does not establish an attorney-client relationship.
Venture Capital Attorney
There may be 409A issues relating to pricing of the shares you received. Generally, a company should be issuing stock options at an exercise price equal to fair market value of the shares at the time of grant. This minimizes the tax implications for the option recipient. However, many companies guesstimate the fair market value, which can lead to problems.
Our firm specializes in startup and investor representation. We would be happy to advise you on this matter.
No Attorney-Client Relationship. This post has been prepared by Inna Efimchik of White Summers for general informational purposes only. The information provided herein does not constitute advertising, a solicitation or legal advice. Neither the availability, transmission, receipt nor use of any information included herein is intended to create, or constitutes formation of, an attorney-client relationship or any other special relationship or privilege. You should not rely upon this post for any purpose without seeking legal advice from licensed attorneys in the relevant state(s).
Mergers / Acquisitions Attorney
if you really want stock options, there are two basic flavors - ISOs and NQOs. There is no tax obligation on receipt of either, so long as they are priced properly to comply with IRS 409A. I can send you my memo outlining the differences between options and stock awards, but you will ant to find yourself an attorney licensed in AZ for actual advice for your situation.
General Practice Lawyer
Your question seems to raise more practical than legal issues. First, on the legal front, companies give options to their employees all the time and, if structured properly, they do not raise any financial or tax obligations. This is employee compensation 101 and any experienced corporate lawyer can help the company grant you options.
The bigger question is whether the company feels that you *deserve* these options -- and this is where the practical issues arise. Solid companies are communicative companies where all of the early employees know where they stand from a compensation perspective. Do you meet periodically with your manager to discuss your performance? In those meetings do you discuss your compensation? If not, your management model is currently broken and you need to be proactive in discussing these issues with your manager and ultimately the CEO.
Another issue is whether you received founders’ shares. This is a percentage of the stock when the company was founded. If you did, often you will not receive options until the CEO or board feel that the holding power of those shares is diminishing. This is true even if some of the original investors are working harder than others because different people bring different things to the founding table – for example, some bring deep pockets; some bring programming knowledge; some bring sales/inspirational skills; etc. It all depends on the company, and there is no formula. The key is that everyone within your young company *communicate* regarding these issues or it is going to be short trip for everyone.