What is the purpose of Section 409A? Internal Code Section 409A attempts to limit and regulate the use of “deferred compensation”—that is, the legally binding right to receive compensation in a future year, after it is no longer subject to a substantial risk of being forfeited by…
Holders of stock options must exercise their vested options within a certain predefined time period after they cease providing services to the company. This time period is known as the “post-termination exercise period” (PTEP). What is the standard PTEP? The standard PTEP is three months. This means…
Normally, a stock option can be exercised only with respect to the vested portion. “Early exercise” stock options allow a service provider (employee, contractor, etc.) to exercise a stock option with respect to some or all of the unvested portion. The early exercised shares are shares of…
Historically, in the world of venture-backed startups, investors and entrepreneurs worked from the shared understanding that, once an employee provided “sweat equity” through their services, such employee was entitled to enjoy the future benefits of that equity. As a result, stock plans and award agreements typically did…
In the tech startup world, limited liability companies (LLCs) are fairly uncommon, for some very good reasons. However, in certain circumstances startups can utilize the LLC structure at formation to help maximize the potential qualified small business stock (QSBS) gain exclusion upon the sale of stock of…
“Shadow preferred stock” refers to a series of preferred stock that is created when a SAFE or convertible note converts into stock at a price per share that is less than the price per share for the stock issued in a new equity financing. Shadow preferred stock…
Here are some important things to keep in mind if you are considering raising capital in a SAFE round. What’s the Difference Between a SAFE Financing and a “Priced Round?” When raising capital, one of the main considerations is whether to (a) use a convertible security, like…
Businesses face several considerations when onboarding founders or employees who reside in foreign countries. These issues also apply to U.S.-based founders and employees who move to a foreign jurisdiction and work remotely.
Transfer restrictions are one of the principal tools that startups use to prevent secondary transfers of their capital stock and maintain tight control over their cap tables. The majority view in the market is that it is best to omit transfer restrictions from the bylaws because future…
The difference is in the potential dilutive impact of the SAFE on founders. Post-money SAFEs can dilute founders significantly more than pre-money SAFEs. When SAFEs with a valuation cap convert to equity in a future financing, the price at which they convert is determined as follows: SAFE…
