Equity Compensation

The Human Capitalist Series P.5: Stock Bonus Awards

A stock bonus is the issuance of a share of stock without payment of any purchase price. The stock bonus can be granted subject to vesting or can be granted fully vested, such as in satisfaction of prior services rendered or as an alternative form of payment for a cash bonus obligation.

General Pros and Cons of Stock Bonus Awards

  • Pro: There is no purchase price to pay.
  • Pro: Because the holder receives the “full value” of the award, companies tend to grant fewer shares, thereby reducing the potential dilution to stockholders.
  • Pro: If stock bonus awards are granted as unvested shares at a time when the fair market value of the underlying stock is low, the award holder may wish to file an Internal Revenue Code Section 83(b) election to be taxed at grant, rather than later at vesting (when presumably the stock price will have increased).
  • Pro: Because the taxes paid at grant will generally be less than the fair market value on the date of grant, the award can be economically more attractive than options.
  • Con: Taxes are due immediately on vesting, which can be difficult to administer for a private company whose stock is not liquid.
  • Con: If the awards are granted unvested, the Section 83(b) election must be timely filed and received by the IRS, or else the recipient is taxed on each vesting date.
  • Con: A Section 83(b) election may not be economically affordable.
  • Con: If no Section 83(b) election is made, it may be difficult to determine the amount of tax due at vesting if a fair market value determination can’t easily be made at vesting (e.g., if a prior Section 409A valuation is no longer valid).

Accounting Treatment—Stock Bonus Awards

The value of a stock bonus award that has time-based vesting is measured on the grant date based on the number of shares subject to the award and the current fair market value per share of stock. This value is recognized for financial statement purposes over the vesting period as a non-cash compensation expense.

How to Prepare for an Equity Financing

We have covered in past FTTWs how to value your startup and how much capital to raise. Once your startup decides to pursue equity financing, you should start to prepare for the investor due diligence process. On the business side, you will need to prepare a business plan and should take steps such as obtaining management references, interviews and background reviews, customer/user references, technical/product reviews, financial statements and business model reviews.

What Every Startup Needs to Know

On Wednesday, June 26th, Perkins Coie’s Palo Alto office hosted the startupPerColator event, “What Every Startup Needs to Know.” Lowell Ness, a Perkins Coie partner in the Emerging Companies & Venture Capital (ECVC) practice, moderated a panel which included Herb Stephens of NueHealth, Thomas Huot of VantagePoint Capital, Jennifer Jones of Jennifer Jones and Partners, Yuri Rabinovich of Start-up Monthly, and Olga Rodstein of Shutterfly.