Congratulations on starting your company, there is so much to do!!!!! As you start bringing on your co-founders, first employees, and contractors it’s important that you have incentives for them to build the business and increase the company’s valuation.
The process to issue stock or ownership to these people depends on what type of corporate structure you have. Below is a quick summary of the approach based on your corporate structure.
If you have a C-Corporation, you will have a portion of your total registered common shares carved out for an option pool and reserved for your contractors and employees. The pool is typically 12%-15% of the total registered shares. You would issue Incentive Stock Options to your US Domestic employees and Nonqualified Stock Options to your foreign employees and contractors. These options would typically have a vesting schedule of three to four years and a strike price which may be just a few pennies per share or even less for the initial start-up issuances. Be aware that there are rules around the strike price of these options for IRS purposes. While that topic is too big to discuss here, we’re glad to walk you through that jungle.
If you are an LLC or Partnership you would issue Partnership Units instead of stock options. These would likely have a vesting schedule with terms similar to that under a C-Corporation. Once an employee or contractor vests and purchases their Partnership Units they would become a partner and sign the LLC Operating Agreement, so be sure to have tight guidelines around the Partner’s rights and responsibilities. There is generally far greater transparency with the person once they become a Partner, heads up on that.
If you want to issue ownership to a co-founder, you may opt to issue restricted stock or grant restricted partnership units. Or maybe issue just straight shares or units with no restrictions, it really depends on the relationship and agreements you have in place between the founders. If you issue restricted stock or units (which typically include some sort of vesting schedule) be aware that there are potential tax consequences to this approach and it may be appropriate to make certain IRS tax filings once receiving these restricted grants. Those rules are too in the weeds for this quick tutorial!!!!
Happy building, may your company be a unicorn and all your dreams come true. If you ever need help or advice, just reach out to us at TruSpan, we are here for you.
TruSpan Financial is a finance service company based in Austin, TX that provides finance as a service and strategic financial solutions for your business. TruSpan offers forever free financial forecast software and financial modeling software to start-up and growing companies.