Equity Grants

Why Equity Compensation Matters

• Talent magnet: Competitive equity packages are often expected in the startup world.
• Cash preservation: Grants help compensate key hires when salaries may be below market.
• Alignment: Employees and advisors share in the upside when the company grows.

Types of Equity Awards

We advise on the full range of equity compensation structures:

• Stock Options
   
  • Incentive Stock Options (ISOs): Available only to employees, with favorable tax treatment if requirements are met.
   
  • Nonqualified Stock Options (NSOs): Can be granted to employees, contractors, and advisors, with more flexibility.
 
• Restricted Stock Awards (RSAs): Actual shares issued upfront, usually subject to vesting and company repurchase rights.
• Restricted Stock Units (RSUs): A promise of stock delivered in the future, often used by later-stage companies.
• Profits Interests (for LLCs): A way to grant a share of upside growth without current ownership.

Each has different tax, accounting, and administrative implications. We help you select the right mix based on your company’s stage and goals.

Equity Incentive Plans

Most companies adopt an equity incentive plan early on. This plan sets the rules for option grants and other awards, and it must be approved by the board and stockholders. Key elements include:

• Number of shares reserved for awards.
• Eligible recipients (employees, consultants, directors).
• Vesting schedules and acceleration provisions.
• Administration by the board or compensation committee.

Proper board and stockholder approvals are essential for validity and investor confidence.

Securities Law Compliance

Equity awards are securities—and subject to federal and state securities laws. Startups typically rely on exemptions like:

• Rule 701: The most common exemption for private company equity awards.
• Rule 506(b): Often used for awards to executives and directors when Rule 701 limits are exceeded.
      Failure to comply can expose the company to rescission claims, regulatory enforcement, or jeopardize future financings. We ensure your grants are structured to fit within the right exemptions and state “blue sky” rules.

Tax Considerations

Equity awards can trigger both income tax and employment tax. Key issues include:

• Exercise price: Options must be priced at or above fair market value to avoid adverse tax consequences (Section 409A).
• 83(b) Elections: Founders or employees who receive stock subject to vesting should consider filing an 83(b) election to lock in a low tax basis and start the capital gains clock. (See our Formation page for more detail.)
• Withholding obligations: Companies may be required to withhold and remit taxes when awards vest or are exercised.

Best Practices for Administering Equity

• Keep your cap table updated and accurate.
• Obtain regular valuations (409A appraisals) to support option pricing.
• Document every grant through board/committee approvals, agreements, and updated ledgers.
• Deliver all required plan and grant documents to recipients.
• Track vesting, expirations, and exercises with a reliable system.

‍What’s the difference between ISOs and NSOs?
ISOs are for employees only and can offer favorable tax treatment if held long enough. NSOs can be issued to anyone but are taxed as ordinary income on exercise.

When should I adopt an equity incentive plan?
Most startups adopt a plan right after formation—before making their first key hires. Investors will expect one to be in place.

Do I need a valuation before granting options?
Yes. A 409A valuation (or equivalent) is required to set a defensible fair market value and avoid tax penalties.

Can contractors receive equity?
Yes, usually through NSOs or restricted stock. However, securities law exemptions and tax treatment differ, so careful structuring is required.

What happens if we don’t comply with securities laws when granting equity?
You may face rescission claims, regulatory penalties, or issues in future financings or exits. Compliance is critical from the start.

Do employees pay tax when options are granted?
No, typically not. Tax usually arises when options are exercised or when restricted stock vests (unless an 83(b) is filed).