If you work at a startup, company equity is likely a key part of your compensation. It’s also likely to be very confusing. Use these to fully understand your equity compensation package and the tax implications of various scenarios. Thinking of switching jobs? Use this to learn how to evaluate and compare company offers and what many “market” practices are regarding employee equity.
Your stock options represent the right to purchase shares of your company at a fixed price, known as the exercise price. You earn the right to exercise your options over time through a process called vesting, the timeframe of which is stipulated by a vesting schedule. There are two types—ISOs and NSOs—and early-stage companies will typically issue a mix of both to their employees.
RSUs turn into shares of your company’s stock when they vest. They’re typically issued by companies valued at over $1 billion.
Your venture backed company is growing and you are hearing rumors of a potential public listing. It typically takes a company 18-24 months to get itself into accounting shape to go public. That’s because as a public company, there will be a lot of new financial reporting and other regulatory requirements to satisfy. Often the company will hire a new CFO or other executive with public company experience to lead the effort to take the company public. Accounting practices will need to be updated to public company standards and financial controls must be implemented. During the pre-listing-but-very-likely-to-list period—let’s call it the pre-liquidity period—there are a few financial planning techniques that you should consider.
A tender offer is a structured event where the company or third-party investors offer to buy your shares from you for cash at some prevailing price. Often this accompanies a financing round where additional money is coming into the company. However, some companies do tender offers out of their operating profits. Tender offers are tightly controlled, with set timeframes, prices, and many regulations to be followed.
Startup founders, employees, and investors can all benefit from owning “Qualified Small Business Stock” (QSBS). QSBS refers to the tax exemption found in Section 1202 of the US tax code that enables each taxpayer to receive tax-free gains from the sale of stock, up to the greater of (i) $10 million, or (ii) 10x their original investment.
Planning for retirement often feels pointless. You’re young and your startup is taking off — why should you worry about retirement now?