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startups LEGAL ADVICE BY ARTHUR L. WEISS, ATTORNEY
Dear Art: I have this great idea for a tech company! I also have the resources, talent and funds to make it happen. But before I get started, I want to ensure I've protected myself from a legal standpoint. What do I need to do? Just about every technology startup has two things in common: (1) it needs highly skilled and visionary employees and (2) it lacks the funds to pay them. Hence the rise of equity compensation, the use of corporate stock or options to make up for the financial shortfall. The concept seems easy, pay what you can afford and issue some company stock to make up the difference. This serves two complementary purposes, it saves whatever money the company has in the bank and it aligns the interests of the founder with those of the employees. It should be pretty simple to do, an entry in 28 • VIP ALEXANDRIA MAGAZINE
a spreadsheet or a capitalization table, maybe issuing a pretty stock certificate for the shares. Unfortunately, the IRS sees things differently. Relying on their basic principle – why make things simple when you can make them complicated? – the IRS has rules, exceptions to the rules and exceptions to the exceptions. It is a veritable alphabet soup of choices (ISO, NSO, RSU, RSA, NQDF) each with its own rules, tax postures and traps. What is common to each of these choices is the need for a well-drafted, comprehensive plan. If you are planning on only issuing stock as compensation then the plan need not address all the other types of equity compensation. However, if you are planning now or in the future to issue options, stock, warrants, etc, then you should bite the bullet upfront and have an “omnibus” plan drafted to cover all the bases.
