Venture Capital Term Sheet Negotiation — Part 20: Founders’ Stock

This post is the twentieth in a series giving practical advice to startups with respect to understanding and negotiating a venture capital term sheet.

In the prior nineteen posts, we provided an introduction to negotiation of the term sheet and discussed binding and non-binding provisions and discussed valuation, cap tables, and the price per sharedividends on preferred stockliquidation preferencesthe conversion rights and features of preferred stockvoting rights and investor protection provisionsanti-dilution provisionsanti-dilution carve-outs and “pay to play” provisionsredemption rightsregistration rights,  management and information rightspreemptive rightsdrag-along rights, representations and warranties, rights of first refusal and co-sale, closing conditions and expenses, non-competition and non-solicitation agreements, non-disclosure and developments agreements, and board matters. In this post, we will discuss founders’ stock.

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Stock Options versus Stock Warrants – What’s the Difference?

I frequently hear clients and some of their advisers talk about “stock options” and “stock warrants” and there is often considerable confusion between the two. In this post, I’ll briefly describe the major distinctions between these instruments and how each can be used in a privately held company. [Read more…]

Retaining Key Employees in a Privately-Held Company through Equity Compensation – Part 5: Accounting Implications

This post is the fifth in a series exploring techniques to attract and retain key employees, directors, and other service providers of privately held companies through equity-based compensation arrangements and alternative arrangements that provide cash payments tied to the value of the company’s stock or ownership interests.

Previously, I provided an overview and discussed the tax treatment of various equity compensation arrangements typically used by corporations, such as stock options, restricted stock, phantom stock, and stock appreciation rights and the tax treatment of profits interests in entities taxed as partnerships (like LLCs). In this post, we’ll briefly discuss the accounting treatment for some of these vehicles (and in particular, the effects on the company’s P&L). While the details of accounting for stock-based compensation and deferred compensation plans are complex and certainly beyond the scope of this blog post, the basic concepts are important and should be considered before such awards are made. In particular, companies considering awards will want to have an understanding of the potential expenses that will be recognized on the company’s P&L in connection with an award and how those expenses might affect financial statements and agreements with third parties (e.g. financial covenants in a loan agreement).

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Retaining Key Employees in a Privately-Held Company through Equity Compensation – Part 4: “Profits Interests” in LLCs and Partnerships

This post is the fourth in a series exploring techniques to attract and retain key employees, directors, and other service providers of privately held companies through equity-based compensation arrangements and alternative arrangements that provide cash payments tied to the value of the company’s stock or ownership interests.

Previously, I provided an overview and discussed the tax treatment of various equity compensation arrangements typically used by corporations, such as stock options, restricted stock, phantom stock, and stock appreciation rights. In this post, I’ll discuss a popular technique, called a “profits interest,” which is available to entities taxed as partnerships, such as limited liability companies (or “LLCs”). Profits interests can provide a tax efficient way to reward key service providers. Since LLCs are the most popular type of entity taxed as a partnership, for the rest of this post, I will assume that the entity in question is an LLC.

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Retaining Key Employees in a Privately-Held Company through Equity Compensation – Part 3: Tax Treatment of Various Plans

This post is the third in a series exploring ways to attract and retain key employees, directors, and other service providers of privately held companies (herein “service providers”) through equity-based compensation arrangements and alternative arrangements that provide cash payments tied to the value of the company’s stock.

Previously, in the first and second posts of this series, I provided a general overview of four alternatives available to private companies to provide equity-based compensation to key employees and other service providers and some of the factors used to select among these alternatives. In this post, I’ll describe the federal income tax treatment of stock options, restricted stock, phantom stock, and stock appreciation rights, both from the employer and employee perspective. [Read more…]