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Seminar on Equity Compensation 4/6/11 By Richard Lucash McCarter & English LLP
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Rick LucashSpecial Counsel
McCarter & English, LLP617.449.6568
[email protected]@ricklucash
A Piece of the Pie: Equity Compensation for Emerging Technology Companies
Travis DrouinCPA, Partner
MFA – Moody, Famiglietti & Andronico, LLP
@TravisDrouin
Theo SharpManaging Director
Pearl Meyer & Partners508.630.1498
Christine MooreVice President
Pearl Meyer & Partners508.630.1491
David Hughson Vice Consul
British Consulate UK Trade & Investment
@UKTI
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Twitter Info
Tweeters!
We are at @UKTI #CambridgeToday’s hashtag is #EqComp
Presenters are: @RickLucash from @McCarterEnglish
@TravisDrouin from Moody, Famiglietti & Andronico, LLP Theo Sharp and Christine Moore, Pearl Meyer & Partners
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Equity Allocation - How
♦ How– Founders Stock– Restricted Stock– Options
ISOs Nonquals
♦ Who– Key team members– Rank and file– Advisers
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Restricted Stock
♦ Stock that is subject to vesting– All or some
♦ “Forfeit” unvested stock if leave the company
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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?
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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
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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
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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
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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
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Dilution
♦ It will happen
♦ Not inherently bad – percentage goes down but value can go up
♦ Control need not track percentage ownership
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How Much?
♦ Target for VCs is 20% for the “sweat equity” (including founders)
♦ “Percent of the company”– What’s the denominator– “Full diluted”– Use for initial key hires
♦ Brackets for the rest – target a fraction/multiple of salary (based on current value)
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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 LucashMcCarter & English,
LLP617.449.6568
[email protected]@ricklucash
@mccarterenglish
A Piece of the Pie: Equity Compensation for Emerging Technology Companies
Travis DrouinCPA, Partner
MFA – Moody, Famiglietti & Andronico, LLP
@TravisDrouin
Theo SharpManaging Director
Pearl Meyer & Partners508.630.1498
Christine MooreVice President
Pearl Meyer & Partners508.630.1491
David Hughson Vice Consul
British Consulate UK Trade & Investment
@UKTI
