

A Guide to Stocks & Options for the Startup Entrepreneur (or Employee) - dweekly
http://www.scribd.com/doc/55945011/Intro-to-Stock-and-Options
This is the guide I wish someone had given me when I started my first company and transitioned from Engineer to CEO!
======
JacobIrwin
Here's a bit of information I found regarding Founder's Stock (reported here
in similar Scribd fashion):

To ensure that stock issued to founders is properly "earned" by each founding
stockholder, startup companies typically put in place stock restriction
agreements with each founder. The primary purpose of this agreement is to give
the company a right to purchase shares held by a founder in the event that the
founder leaves the company for any reason. This purchase option generally
applies only to shares that are unvested at any given point in time, with
shares becoming vested over a predetermined, usually time-based, schedule.

There are several variables that need to be determined when putting in place
stock restriction agreements. They include the overall duration of vesting,
whether there is any up front vesting, what period of time, if any, must
elapse before there is any additional vesting, and under what circumstances
there may be additional or accelerated vesting-for example in connection with
a change of control of the company, or upon the termination of the founder.
Venture capitalists have established certain acceptable ranges for these
variables.

From the founders' perspective, one of the most important areas of concern is
the basis upon which their shares accelerate in the event they are terminated.
In the event the founder resigns voluntarily or is terminated for cause, no
additional stock vests. However, if the founder is terminated without cause,
or resigns for good reason (in other words, is "forced out"), there arguably
should be some compensation to the founder out of fairness, and to deter the
board from terminating key people in order to recoup equity. Occasionally
founders are able to negotiate for partial or even full acceleration. The
definition of what constitutes "cause" for purposes of determining whether
termination triggers acceleration is critical but subtle, and any common
stockholder should be aware of the drafting options and seek advice of counsel
to ensure his or her interests are protected.

Related to the question of whether acceleration occurs upon termination is the
issue of what happens upon a change of control. Full acceleration is often a
reasonable starting point for negotiation. After all, if the company is sold,
the founders who are still with the company likely made significant
contributions to put the company in a position to be acquired. Venture
capitalists and other stockholders who do not stand to realize any
acceleration, however, are likely to oppose acceleration upon change of
control. This acceleration will simply result in dilution to them and reduce
their share of the consideration received in the acquisition. If full
acceleration cannot be negotiated, an alternative is to request additional and
possibly full acceleration if the founder is let go or resigns for good reason
within one year following a change of control-a mechanism that is sometimes
called "double trigger" acceleration. However, this compromise position only
works well in practice when the change of control calls for the founders to
receive "replacement" equity with respect to their unvested stock. The "double
trigger" concept does not translate as cleanly where the consideration
received by the selling stockholders is cash, and specific provision should be
made for this situation, again with advice of counsel. If full acceleration
either at change of control or pursuant to a double trigger is not acceptable,
then the company and the founder may agree to a mechanism that is simpler to
apply, such as one year or 50% vesting upon a change of control.

Founder's stock issues, especially as they relate to vesting, can be quite
complex and assistance of legal counsel can help improve a founder's situation
significantly. Founders should consider retaining separate legal counsel to
advise them on these issues.

SOURCE: <http://www.mbbp.com/resources/business/founder_rights.html>

~~~
beagle3
And super important: an 83(b) election, or you're going to regret it dearly.
The document linked from the HN post describes how and why in the "Strategies
and Pitfalls" section.

------
sbarre
This is a great write-up. I was more or less familiar with the basics of all
this, but I learned a lot of details.

I wish something like this existed that explained all the tax/income issues
for Canada..

------
nickpatrick
Great read, David. Thanks for sharing.

One thing that I'd be curious to learn that isn't covered in the write-up: How
exactly did you learn all of this? You say "on the job," but can you
elaborate? How knowledgeable were you when, say, you raised your first round
of financing, and how much did investors help you through the process?

~~~
dweekly
I knew pretty close to nothing when I raised my first round of financing. I
have been programming since the age of five (with an Apple II/c then!) and got
my CS degree at Stanford, but I never had any formal business education. I
started the company that became PBworks in 2003 after working for a large
company (Legato, now part of EMC) and a smaller one (There.com, now defunct),
as well as starting a non-profit called the California Community Colocation
Project (also defunct, though our lasting contribution to mankind is OPG v.
Diebold). So I've been at it for almost 8 years, which makes me somewhere
between a "veteran" and a "long-in-the-tooth loser" depending on your
worldview.

Investors did not help a lot in the education process, but I received
mentorship (both formal and casual) that proved invaluable throughout the
process. One of the reasons why I am passionate about mentoring startups is
that a huge number of people gave me a hand - and an education - as I tried to
figure out the whole thing.

If you get nothing else from this: get a good mentor or two. Silicon Valley is
built on people helping people to a degree that just isn't common in the rest
of the business world.

~~~
chopsueyar
I am very interested in the process of starting a non-profit with a technology
focus.

Can you provide any information relating to your personal experiences with
starting the California Colocation Project?

------
JacobIrwin
"I’d recommend the movie Brazil to those of you amused to explore dystopian
authoritarian regimes mired in needless paperwork."

...is a good recommendation.

Another is The Mystery of Capital by de Soto

------
simonista
Awesome writeup. Thanks so much for doing it.

There's an error in the third paragraph of the equity financing section. The
last sentences trails off without ending.

I also have two suggestions for things to add. 1. Are there similar tax issues
to watch out for as a founder who owns a large percentage of common stock from
the beginning of the company. 2. I think it would be helpful in the
convertible note section to have an example of how debt converts to stock like
you have an example of how debt converts to cash in a sale.

Thanks again!

~~~
dweekly
Very helpful feedback; I'll try to take this into account in the next version
of the document!

------
pjy04
83b election just blew my mind

------
mrhahn
One thing I've always wondered.. if as an employee your stock options have a
vesting period, and during that period the company is acquired, do you benefit
as if you owned those shares? Or is it only on the options that have vested
and you've taken up?

~~~
arkem
From what I understand (largely from reading the linked document) is that the
employee is likely to have an acceleration clause of some kind that vests your
outstanding options after a certain event happens. Common types are single
trigger which occurs on change of ownership and double trigger that requires
change of ownership and for the employee to leave the company.

There was also something about these terms being negotiated as part of the
change of ownership but that kind of thing is completely beyond my knowledge.

------
sirclueless
Woohoo. Glad he describes how to get your windfall as long term capital gains,
at 15% tax rate. AKA the main reason that the average tax rate of the top 400
earners in the US is 17%.

------
dweekly
As an FYI, on May 25, 2011 I updated the linked document to a Second Edition
that goes into more detail and corrects an AMT explanation and math.

------
pgisaweenis
Does anyone have a non-Scribd version of the actual PDF or a GDocs-hosted
version they could link to?

~~~
KishoreKumar
[https://docs.google.com/viewer?a=v&pid=explorer&chro...](https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B05HI8_2Zj9KYTA1MTA5YTgtMDI0NC00OGNiLTgwZDQtZmRmYThjNGVmZmUy&hl=en_US)

~~~
pgisaweenis
Thanks a bunch KishoreKumar.

