Once you know the size of your grant, you must find out the following before you take any action with an equity award in a privately held company:
- Is your award a grant of stock options (whether NQSOs or ISOs), restricted stock/RSUs, stock appreciation rights (SARs), or synthetic equity, such as phantom stock? Or does it consist of an interest in a limited liability company or shares deposited into an ESOP?
- How did the company devise its valuation method for setting exercise prices?
- How will you pay the taxes or exercise costs, given that you cannot sell shares to fund them? For example, does the company offer loans?
- Will the company create liquidity for its stock other than launching an initial public offering or being acquired by another company?
- What are the vesting rules? For example, do the grants fully vest only after an IPO, acquisition, or some other type of liquidity event?
- What are the SEC rules and contractual restrictions on resales of the stock after a liquidity event?
- How soon after an IPO can you sell the shares?
- Are there buyback provisions and repurchase rights that allow your employer to repurchase shares if you leave the company? Alternatively, how soon after you terminate employment must you exercise options to avoid forfeiture? Would the exercise trigger a noncompete provision?
- Do you have early-exercise options? These provide the ability to exercise options immediately upon grant and receive shares through a reverse vesting schedule.
- What special investors' rights, such as those related to dilution, liquidation preferences, and acquisition proceeds, affect your potential gains?
You must also understand the tax treatment, which is the same as that of equity awards at public companies. However, shares acquired from equity awards at pre-IPO companies are initially restricted securities, which can present a tax dilemma.
The financial-planning issues of equity awards at pre-IPO companies can be unique. To maximize the potential value of your grants, you should become familiar with the key planning points and know how your new grants are likely to change after your company goes public.