Pre-IPO › Basics

Employees in startup companies often have misconceptions about their stock options and restricted stock. Understand what could happen to your stock options or restricted stock in venture capital financings, in an acquisition, or in an IPO. Part 1 looks at M&A deals; Part 2 analyzes IPOs.

Stock options in private companies can create wealth; but unlocking their value when the company's stock has no immediate liquidity calls for special planning. For guidance on how to finance exercises of private company stock options, we asked an experienced financial advisor for her insights, including new financing methods that have developed.

Podcast included! 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.

Once you reach the pivotal point in your career where several companies want you, employers will negotiate with you to entice you to join them. That's good, but you need to be prepared. This article explains what you should know and consider before you start any job negotiation involving equity compensation.

Shares in privately held companies lack liquidity and thus cannot be sold, creating difficulty when taxes are owed on income recognized from stock option exercise and RSU vesting. To address this problem, the Tax Cuts & Jobs Act introduced an income-deferral opportunity for certain types of stock compensation at private companies. These "qualified equity grants" are now provided by the Section 83(i) of the tax code.

Restricted stock, restricted stock units (RSUs), and restricted securities are often confused by employees, companies, and financial advisors alike. That can be problematic. Those three things are not the same—and understanding which you have matters, as a lawsuit by current and former Uber employees demonstrates. This article explains the differences.

Equity compensation is often a significant component of the total compensation paid to employees and other service providers. While some provisions of private company equity plans mirror the provisions in public company plans, in the private company context, equity compensation raises special concerns.

Podcast included! If you work for a limited liability company (LLC), your employer may want to offer you an incentive, above and beyond salary, that is based on receiving a share of equity in the company. This article discusses types of equity plans that are available to LLCs and also examines the considerations involved in the establishment of an equity compensation program for an LLC.

Podcast included! The tax treatment of equity compensation provided by a limited liability company (LLC) is an important consideration for both the LLC that grants equity and the employee who receives it. Part 2 of this series delves into the federal tax consequences of each type of equity plan.

Particularly in high-tech startup companies, it is more important to know what percentage of the company a stock option grant represents than how many shares you get.

A happy tale about the difference that stock options can make in the lives of ordinary workers, especially at pre-IPO companies which become successful and then go public.

Stock in private companies lacks liquidity, is not registered with the SEC, and usually has company-imposed contractual resale limits, so resales are difficult and need to follow the requirements of SEC Rule 144. Some private companies allow resales of stock by...

Unlike with public company stock compensation, you cannot sell the shares at exercise or vesting to pay the tax withholding. Your company will have...

If your employer is a for-profit corporation, it probably can offer stock options, restricted stock, or other types of equity compensation to its employees. There may, however, be many reasons why your employer is not offering stock grants...

Companies have flexibility in setting the conditions on which their stock grants can vest. This type of double-trigger vesting allows your company to base the vesting of your grant on...

Yes. The Tax Cuts & Jobs Act introduced a type of equity award that gives employees in private companies extra time to pay federal income tax on...

While it is hard to find data, we have located a few sources. The data and examples from the surveys summarized here show that...

Unlike public companies or large private companies that may have grant guidelines, most private companies determine the grant size by a combination of factors. Surveys show that...

At pre-IPO and other private companies, boards of directors usually determine exercise prices for stock options. They base them on the stock's fair market value. Methods for valuation include...

There may be several reasons. With restricted stock units (RSUs), the company grants fewer shares, as RSUs are always...

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

The tax treatment for private, pre-IPO, and large publicly traded companies is...

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

Don't confuse restricted securities and restricted stock. They are very different...

In most instances, stock grants are subject to the same types of practical limitations as negotiations for your cash compensation. For example, an employer may...

The future value and its certainty depend on whether you are at a public or a private company. You determine the practical cash value of options in public companies by noting the...

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 size and terms of these grants can be...

The vesting of the grant will probably accelerate according to specifics in your stock plan or grant agreement. The grants will probably be cashed out. Depending on your level in the company and the length of your employment, you may receive a meaningful grant in your newly private company that will require you to...

Private companies often include in the grant agreement the right to buy back the vested shares. The repurchase right can be based on...

The imposition of forfeiture, transfer, and buyback restrictions on you when a new investor acquires stock...

Yes, though for two reasons S-corporations generally do not issue stock options. First...

Yes, but complex issues must be resolved. These matters include the proper treatment under accounting rules for noncorporate entities (FASB's APB No. 25) and tax-basis issues...

Limited liability companies (LLCs), which are somewhat similar to S corporations, have membership interests and not stock. Therefore, LLCs cannot offer stock options, restricted stock, direct rights to shares, or an employee stock purchase plan. However, they can give...

Phantom stock is similar to stock appreciation rights (SARs) in that you receive a sum based on the appreciated value of the company's shares. But instead of shares of stock, phantom stock awards are in the form of...

In most cases, your exercise price for stock options is...

Only for ISOs directly, though even NQSO exercise prices need to follow the rules on nonqualified deferred compensation to avoid becoming discounted stock options. ISOs must be granted at a price which is at least equal to the...

Backdating is a dangerous practice. Courts have imposed prison sentences on corporate executives found guilty of backdating violations. For good reasons, companies now avoid making option grants that are based on the stock price of any date earlier than the date of grant...

Yes, but the arrangement must be carefully structured not to be considered a stock option or nonrecourse loan...

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...

In cashless exercises, a broker sells shares to pay the exercise price and the taxes. The broker then pays this money to your company, and you receive the net amount. In a pre-IPO company...

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

In a public company you would never exercise underwater stock options. In a private company...

Whenever a security is offered or sold, either the security must be registered under the Securities Act of 1933 or there must be an applicable exemption to registration...

Private companies worry about not only compliance with federal and state securities laws at the sale of your shares but also when and to whom you may sell...

Dilution affects both publicly traded and privately held companies, and additional issues arise for private companies...

During the early stages of a company's existence (e.g. up to the first round of venture financing) you may be able to get...

A general formula for calculating dilution of a private company, according to experts, is to assume that...

The AMT adjustment for ISO exercises should apply only if there was a...

You can take a loss from completely worthless shares that you own. Your ability to do so requires that...