A Guide to Stocks & Options for the Startup Entrepreneur (or Employee)
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This is the guide I wish someone had given me when I started my first company and transitioned from Engineer to CEO!
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I wish something like this existed that explained all the tax/income issues for Canada..
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?
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.
Can you provide any information relating to your personal experiences with starting the California Colocation Project?
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!
...is a good recommendation.
Another is The Mystery of Capital by de Soto
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.
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
http://www.scribd.com/doc/55945011/Intro-to-Stock-and-Option... vs. https://docs.google.com/viewer?a=v&pid=explorer&chro...
And the font rendering. God the font rendering is so much better on scribd. But that's because it uses CSS font-faces.
Anyway, the better reading experience on scribd is exactly why I asked :) But I can see why one might consider the Google Docs one `better' in some ways.
BTW this is on Chrome 12.0.742.60 on a new MBP. Perhaps scribd is better optimized for other browsers/platforms.
All in all, strange, given that I'm on an 8-month-old iMac, which shouldn't be that far off from your MBP. Maybe it's just the bleeding-edge Chrome that's the issue.
Regardless, if that's how it's working for ya, I totally get it :)