Equity is how most startups compete for talent they cannot yet pay in cash, and it is also where many of them create problems that surface during their first serious financing or acquisition. Options granted before a board approves them, grants priced without a valid valuation, missing 83(b) elections, and promises made in offer letters but never documented all show up in diligence. We set up equity programs that hold together from the first grant, keep them compliant as the company grows, and represent companies and holders when equity rights are disputed or when a sale requires deciding what happens to every outstanding award.
Choosing The Right Equity Instrument
The right instrument depends on the entity and the stage. Corporations typically grant incentive stock options, which can receive capital gains treatment if Section 422's holding periods and $100,000 annual limit are met, or nonqualified stock options, which are taxed as ordinary income at exercise. Later-stage companies shift toward restricted stock units, which are taxed at settlement and often use double-trigger vesting tied to a liquidity event. Founders and very early employees often receive restricted stock outright and file 83(b) elections. LLCs and partnerships grant profits interests, which can be issued tax-free under Revenue Procedures 93-27 and 2001-43 when properly structured. Each choice affects the holder's taxes and the company's accounting.
Valuations, 83(b), And Rule 701
Stock options stay outside Section 409A only if the exercise price is at least fair market value on the grant date, so private companies rely on a 409A valuation, typically an independent appraisal that the regulations presume reasonable if it is no more than 12 months old and nothing material has changed since. An 83(b) election must be filed with the IRS within 30 days of a transfer of restricted stock, and that deadline cannot be extended. On the securities side, Rule 701 exempts compensatory grants by private companies, but once sales under the rule exceed $10 million in a 12-month period the company must deliver financial statements and risk disclosure to holders. State securities filings may also apply.
Plan Design And Grant Administration
We draft equity incentive plans, option and RSU award agreements, restricted stock purchase agreements, early-exercise provisions, and LLC profits interest grants with the matching operating agreement changes. We set vesting schedules, acceleration terms, and post-termination exercise periods, keeping in mind that an ISO exercised more than three months after employment ends is treated as a nonqualified option. We prepare the board consents that approve grants, confirm the share reserve, and make sure shareholders approve the plan within 12 months so ISOs remain available. When a grant program has gaps, we run a cleanup: ratifying past grants, repricing or reissuing defective options, and correcting the cap table before diligence starts.
Equity In Acquisitions And Disputes
In a sale, the purchase agreement must say what happens to every outstanding award: assumed, substituted, cashed out, accelerated, or cancelled, consistent with what the plan permits. We draft those provisions, model the treatment against the cap table, and address Section 280G and 409A issues raised by the deal. Equity disputes follow the same pressure points. Employees claim they were promised options that were never granted, departed founders challenge repurchase of unvested shares, holders contest the cancellation of awards at closing, and companies seek forfeiture under clawback or restrictive covenant terms. These claims usually arise under contract and state corporate law rather than ERISA, and we handle them in negotiation, arbitration, and court.
Mistakes That Cost Companies Later
The expensive mistakes are usually simple. Grants are promised in an offer letter and never approved by the board, so the price is set later at a higher value. Options are granted on a stale 409A valuation after a financing. Founders miss the 30-day 83(b) window. ISOs are granted to consultants, who cannot hold them, or above the $100,000 limit without tracking the excess as nonqualified. Plans run out of reserved shares and grants are made anyway. LLCs issue profits interests without setting a liquidation value threshold. Each of these can be found and fixed with a review of the board minutes, plan documents, and cap table before an investor or buyer finds it first.
