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Lucash on Equity Compensation

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The document discusses equity compensation strategies for emerging technology companies. It addresses how to allocate equity through restricted stock, options, and other means to founders, key employees, and other stakeholders. The document provides examples of vesting schedules and discusses how dilution may occur as a company grows. It also addresses related tax implications and considerations around determining appropriate allocation amounts.

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Rick Lucash Special Counsel McCarter & English, LLP 617.449.6568 [email_address] @ricklucash A Piece of the Pie: Equity Compensation for Emerging Technology Companies Travis Drouin CPA, Partner MFA Moody, Famiglietti & Andronico, LLP 978.557.5335 [email_address] @TravisDrouin Theo Sharp Managing Director Pearl Meyer & Partners 508.630.1498 [email_address] Christine Moore Vice President Pearl Meyer & Partners 508.630.1491 [email_address] David Hughson Vice Consul British Consulate UK Trade & Investment 617.245.4508 [email_address] @UKTI
Twitter Info Tweeters! We are at @UKTI #Cambridge Todays hashtag is #EqComp Presenters are: @RickLucash from @McCarterEnglish @TravisDrouin from Moody, Famiglietti & Andronico, LLP Theo Sharp and Christine Moore, Pearl Meyer & Partners
Equity Allocation - How How Founders Stock Restricted Stock Options ISOs Nonquals Who Key team members Rank and file Advisers
Restricted Stock Stock that is subject to vesting All or some Forfeit unvested stock if leave the company
Vesting Vesting usually based on length of service Example: 25% after 12 months Then 36 monthly installments Can base on Milestones Retention Grants additional grants periodically so employee always partly vested Partial Vesting only on Liquidity?
Accelerated Vesting Avoid for people you want to keep after sale of company Key players may demand Rank and file often do not get, either May accelerate only some of equity Double-trigger change of control + termination
Restricted Stock Tax Tax on value as it vests BAD 83(b) election Pay tax on value when received Then NO more tax until sell And good shot at (low) long term cap gains rate Do you feel lucky? So works best when value is low
Options Right to buy stock in future at a price set today Strike Price and 409A Consultants who do 409A valuations for emerging companies Vesting Similar issues as with restricted stock ISOs (no tax on exercise) vs. nonquals More important for companies going public
Option Conundrum Use it or lose it if leave the company Vested options terminate short time after leaving company Cost to exercise Tax on exercise Unvested options evaporate
Dilution It will happen Not inherently bad percentage goes down but value can go up Control need not track percentage ownership
How Much? Target for VCs is 20% for the sweat equity (including founders) Percent of the company Whats the denominator Full diluted Use for initial key hires Brackets for the rest target a fraction/multiple of salary (based on current value)
Dilution Scenario Start: Founders 100% 7.5% to key hires => Founder 92.5% Seed: Angels 10%, Founders 90% x 92.5% = 83.25%; VC: 20% with 10% pool. First apply pool (12.5%) => Founders 83.25x87.5 = 72.8% Then 20% => Founders 72.8 x 80% = 58.3% BUT Board is likely 2 founders, 2 investors and one neutral
Questions?
Rick Lucash McCarter & English, LLP 617.449.6568 [email_address] @ricklucash @mccarterenglish A Piece of the Pie: Equity Compensation for Emerging Technology Companies Travis Drouin CPA, Partner MFA Moody, Famiglietti & Andronico, LLP 978.557.5335 [email_address] @TravisDrouin Theo Sharp Managing Director Pearl Meyer & Partners 508.630.1498 [email_address] Christine Moore Vice President Pearl Meyer & Partners 508.630.1491 [email_address] David Hughson Vice Consul British Consulate UK Trade & Investment 617.245.4508 [email_address] @UKTI

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Lucash on Equity Compensation

  • 1. Rick Lucash Special Counsel McCarter & English, LLP 617.449.6568 [email_address] @ricklucash A Piece of the Pie: Equity Compensation for Emerging Technology Companies Travis Drouin CPA, Partner MFA Moody, Famiglietti & Andronico, LLP 978.557.5335 [email_address] @TravisDrouin Theo Sharp Managing Director Pearl Meyer & Partners 508.630.1498 [email_address] Christine Moore Vice President Pearl Meyer & Partners 508.630.1491 [email_address] David Hughson Vice Consul British Consulate UK Trade & Investment 617.245.4508 [email_address] @UKTI
  • 2. Twitter Info Tweeters! We are at @UKTI #Cambridge Todays hashtag is #EqComp Presenters are: @RickLucash from @McCarterEnglish @TravisDrouin from Moody, Famiglietti & Andronico, LLP Theo Sharp and Christine Moore, Pearl Meyer & Partners
  • 3. Equity Allocation - How How Founders Stock Restricted Stock Options ISOs Nonquals Who Key team members Rank and file Advisers
  • 4. Restricted Stock Stock that is subject to vesting All or some Forfeit unvested stock if leave the company
  • 5. Vesting Vesting usually based on length of service Example: 25% after 12 months Then 36 monthly installments Can base on Milestones Retention Grants additional grants periodically so employee always partly vested Partial Vesting only on Liquidity?
  • 6. Accelerated Vesting Avoid for people you want to keep after sale of company Key players may demand Rank and file often do not get, either May accelerate only some of equity Double-trigger change of control + termination
  • 7. Restricted Stock Tax Tax on value as it vests BAD 83(b) election Pay tax on value when received Then NO more tax until sell And good shot at (low) long term cap gains rate Do you feel lucky? So works best when value is low
  • 8. Options Right to buy stock in future at a price set today Strike Price and 409A Consultants who do 409A valuations for emerging companies Vesting Similar issues as with restricted stock ISOs (no tax on exercise) vs. nonquals More important for companies going public
  • 9. Option Conundrum Use it or lose it if leave the company Vested options terminate short time after leaving company Cost to exercise Tax on exercise Unvested options evaporate
  • 10. Dilution It will happen Not inherently bad percentage goes down but value can go up Control need not track percentage ownership
  • 11. How Much? Target for VCs is 20% for the sweat equity (including founders) Percent of the company Whats the denominator Full diluted Use for initial key hires Brackets for the rest target a fraction/multiple of salary (based on current value)
  • 12. Dilution Scenario Start: Founders 100% 7.5% to key hires => Founder 92.5% Seed: Angels 10%, Founders 90% x 92.5% = 83.25%; VC: 20% with 10% pool. First apply pool (12.5%) => Founders 83.25x87.5 = 72.8% Then 20% => Founders 72.8 x 80% = 58.3% BUT Board is likely 2 founders, 2 investors and one neutral
  • 14. Rick Lucash McCarter & English, LLP 617.449.6568 [email_address] @ricklucash @mccarterenglish A Piece of the Pie: Equity Compensation for Emerging Technology Companies Travis Drouin CPA, Partner MFA Moody, Famiglietti & Andronico, LLP 978.557.5335 [email_address] @TravisDrouin Theo Sharp Managing Director Pearl Meyer & Partners 508.630.1498 [email_address] Christine Moore Vice President Pearl Meyer & Partners 508.630.1491 [email_address] David Hughson Vice Consul British Consulate UK Trade & Investment 617.245.4508 [email_address] @UKTI