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Equity compensation is ownership a company grants to the people who build it, usually as stock options, restricted stock or, in an LLC, profits interests. It matters most when a company can't match market salaries, and again when investors review every grant.
We set up equity programs for startups and growing private companies and work with the company's CPA on tax treatment. Founder stock is covered on our founder equity and vesting page.
Attorney
Equity Awards We Document
Stock Options
Incentive and nonqualified options under a written plan, with an agreement for each recipient.
Restricted Stock and RSUs
Shares issued now that vest over time, and units that become shares once vesting conditions are met.
Profits Interests
LLC incentive units that share only in the value the company creates after the grant.
Advisor Equity
Grants to advisors and consultants, paired with agreements covering their services and intellectual property.
Choosing the Type of Award
Stock Options
The right to buy shares later at a price fixed on the grant date, the usual award at venture-backed corporations.
Restricted Stock
Shares issued now that vest over time. A recipient who wants to be taxed at grant must file an 83(b) election with the IRS promptly; the deadline is short and can't be extended.
Restricted Stock Units
A promise to deliver shares, or their cash value, after vesting, more common at later-stage companies.
When someone leaves, unvested awards are usually forfeited, and an ISO generally keeps its tax treatment only if exercised within a limited time after employment ends.
Securities Rules for Compensatory Grants
Each grant needs an exemption from securities registration. SEC Rule 701 covers private-company grants under a written compensatory plan or contract to employees, directors, officers and individual consultants and advisors. The rule caps how much a company can grant under it over time, with the cap tied in part to the company's size, and a company that grants above a set amount must also give recipients added disclosure, including financial statements. Texas has a similar exemption, and some other states require a notice filing. Our page on private offerings and securities compliance covers investor rounds.
Keeping Grants Clean
Most equity problems start with informal promises: an offer letter mentioning a percentage, a grant the board never approved, or an option priced without a current valuation. They surface in diligence for the next venture financing, when they are harder to fix. We keep approvals, grant agreements and the cap table consistent, and we clean up older grants.
How We Set Up an Equity Program
Size the Pool
We work with the founders and board on the size of the pool.
Adopt the Plan
We draft the plan and the board and owner approvals it needs.
Set the Price
For options, a 409A valuation sets the exercise price at fair market value.
Approve Each Grant
The board approves every grant, and each recipient signs an award agreement.
Record and Comply
The cap table is updated, and each grant's securities exemption is confirmed.
Frequently Asked Questions
Have a question that isn't answered here? Call us at (817) 631-8842 or send a message.
Ask a QuestionWhat is the difference between an incentive stock option and a nonqualified option?
Incentive stock options, or ISOs, can go only to employees and must meet federal tax requirements, including stockholder approval of the plan and an exercise price at least equal to fair market value. In return, they can be taxed more favorably. Nonqualified options can also go to directors, advisors and consultants. We work with the company's CPA on the tax side.
Why does a private company need a 409A valuation before granting options?
An option priced below fair market value on the grant date can be treated as deferred compensation under the federal tax rules the 409A valuation is named for. If it is, the holder must include the deferred amount in income once it vests and pay an additional tax plus interest. Most companies price options from an independent valuation and update it regularly and after a financing or other major change.
Can an LLC give equity to its employees?
Yes. An LLC taxed as a partnership often grants profits interests, or incentive units, which share only in growth after the grant. Under IRS guidance, receiving a qualifying profits interest for services is generally not a taxable event. The company agreement usually needs amendments to create the units.
Does an advisor need a written agreement along with the equity?
Yes. It should describe the services, set the vesting schedule and assign to the company anything the advisor creates for it. Equity for someone whose role is raising money from investors doesn't fit the exemptions for compensatory grants.
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- Priced Equity RoundsSeries Seed and Series A preferred stock rounds, on the company side.Learn More
- Securities ComplianceExemptions, offering documents and filings for private capital raises.Learn More
- Founder Equity and VestingFounder stock, vesting, IP assignments and the first cap table.Learn More
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