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Negotiating And Structuring Your Stock Compensation (Part 2): Privately Held Companies

Alisa J. Baker
Part 1 looked at the problems of conflicting or inconsistent provisions among different documents. Part 2 discusses which existing documents and rules nonfounder executives must consider when negotiating for equity compensation during the early (pre-public) stages of a company's development and growth.

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Can consultants or independent contractors be granted stock options or company stock? How common is this practice?

Private companies sometimes partly use stock options (NQSOs, not ISOs) or stock grants, along with or instead of cash, to compensate consultants and independent contractors (separate from grants that public and private companies make to nonemployee directors). The terms of these grants can be...

What happens to my stock options if I switch from employee to consultant status?

In most cases, vesting ends. However, some grant agreements or plans provide that the options are unaffected when...

Are there any rules of thumb for how many options or shares of stock that consultants should receive on a project?

While there are no standard rules of thumb, there are methods you can try. Just as with employee grants, company grant practices for consultants vary widely even within a...

Are the tax rules, withholding, and tax return reporting for NQSOs different if I am an independent contractor, consultant, or outside director and not an employee?

In some ways they are similar, though different if you were an employee at the time of grant. The tax treatment of NQSOs is...

Are the tax rules, withholding, and tax return reporting for restricted stock different if I am an independent contractor, a consultant, or an outside director and not an employee?

In some ways they are similar. The tax treatment of restricted stock is the same for everyone. The reporting and withholding income is different. If you are an employee...

Can independent contractors, consultants, or outside directors be granted ISOs?

The Internal Revenue Code has strict rules for incentive stock options (ISOs). Grants of stock options to nonemployees will be...

Do the terms in option grant agreements to consultants differ from the terms in employee grant agreements?

At a glance, you may not be able to distinguish a company's stock option grant to an employee from a grant to a consultant...

What are the special issues with options and restricted stock granted to consultants that I need to consider in negotiating my agreement with the company?

The five most significant issues for consultants are...

Are consultant stock options subject to vesting schedules?

Usually, yes. In most instances, consultants are expected to render services over a period or to complete a project...

How does the vesting of stock options for consultants and contractors differ from the vesting of grants to employees?

Almost all grants to W-2 employees base vesting on...

How do I know whether I am still "consulting" or "rendering services" for purposes of vesting and exercisability of options?

This determination involves a close reading of any consulting and grant agreements. If the parties have not...

When my consulting project ends, what should I do to ensure that I get my options or stock? How do I prevent losing my options?

Before completing your project, check the terms of your grant agreement and the company's stock-option plan...

I just heard that the company I did consulting work for is about to go public or be acquired. What should I do about my options or stock?

Generally, no action is necessary if you already...

Do securities laws and regulations place restrictions on stock options or shares granted to consultants and on their freedom to sell the stock?

Yes. A consultant to a private company needs to find out whether the options or shares...

I may leave my company to become a consultant, retire, or take another job. Will taxes still be withheld on my NQSOs, SARs, and/or restricted stock as they were when I was an employee? What if I live in another state when I exercise them?

Most companies base withholding on your employment status at the time of grant. If you work elsewhere or are retired at exercise or vesting, then...

Can a consultant use the proceeds from an NQSO exercise or restricted stock vesting to fund a Keogh or SEP?

As long as the NQSOs and restricted stock generate ordinary income, you can...

Do advisory-board members usually receive stock options? Does this bear disadvantages for companies?

Many pre-IPO companies establish advisory boards consisting of members who know the company's industry and advise...

I am a consultant. If I have stock options in a pre-IPO company, do I have the right to receive financial statements or shareholder reports?

As with optionholders who are employees, you are not a stockholder of the company until you...

Can a private company contractually restrict my ability to resell my shares, or do the securities laws limit my ability to resell them?

It is not easy to sell stock in privately held companies. Most make shareholders obey...

Is the date for determining taxes delayed if the stock I receive is not registered with the SEC and I cannot immediately sell it?

As the IRS confirmed in Revenue Ruling 2005-48, the tax-measurement date...

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