The vast majority of technology startups are capitalized in the same manner: common stock to the founders, common stock reserved in an option pool for employees and consultants, and preferred stock (Series A, Series B, etc.) sold to investors. However, a small but probably growing percentage of startups consider a more complicated stock structure that includes, in addition to the types of equity above, a special class of common stock reserved for founders.
We find ourselves explaining 83(b) elections several times a week, so we thought it would be a good blog topic.
In the start-up world, the opportunity to file of an 83(b) election generally arises in the context of a founder purchasing low-priced “founder” common stock of a start-up company that is subject to vesting, or an employee, director or other service provider of such a company “early exercising” an option for stock that is subject to vesting. Such stock is sometimes also referred to as “unvested” stock or stock subject to “reverse vesting.” All this means is that…
The introduction of a disruptive technology leads to the collapse of sales of recorded music. Does this refer to the impact of legal and illegal digital music downloads on CD sales? Certainly.
Advisory boards are powerful tools used by companies at all stages of development. Advisory boards are generally comprised of business leaders, scientists, professionals or other persons of influence. Advisory boards can have general duties, such as providing critical advice and introductions, or they can be more issue-focused, such as advising on specific industry sectors or particular products, transactions or other critical strategic decisions.
Entrepreneurs think big, with visions of iconoclastic products and services that transcend markets. To help these lofty goals, entrepreneurs must learn lessons from innovators in other industries. Today, we turn to the freewheelin’ Bob Dylan for some unconventional startup advice.
There is no required minimum or maximum number of shares by law that must be issued to founders or reserved in the equity incentive (stock option) pool in a startup. Of course, what does matter is the percentage of the company each individual stockholding represents. A startup may issue 100 shares or 100 million shares at formation, and 50 shares in the former or 50 million shares in the latter still represents 50% of the equity of the startup. A typical equity pool is between 10% and 20% of the total number of shares issued and reserved for issuance.
Perhaps few times for an emerging growth company present more risk than the transition of a founder/CEO to “employee” status. This often happens later in the startup life cycle, when a company has funding and/or sales traction. The difference between a smooth and rocky transition can represent the difference between success and failure of the company.
If there are two or more founders in a startup, an important consideration regarding the initial issuance of equity to the team is vesting of the founders’ equity.
When writing your business plan, stay clear, concise and succinct. Follow these three simple guidelines to better make your point to your intended audience.
1. Cut pretense – and acronyms.
2. State your point in the first sentence.
3. Use easy to read formatting.
Is your business making the world a better place but struggling to communicate its public benefit to consumers and investors? Consider filing as a Benefit Corporation or pursuing B Corp Certification to differentiate your company from the crowd.
