Before issuing equity to employees, you need to be aware of the potential consequences. Sure equity is a tool to hire top talent, but how much equity you give — and to whom — is not a decision to be entered into lightly. For information about issuing equity — and help slicing up the equity pie — check out this deck from Annie Webber from Legal Hero (www.legalhero.com) and David Ehrenberg from Early Growth Financial Services (www.earlygrowthfinancialservices.com).

1. Sharing the Pie:
Restricted Stock and
Stock Options for
Employees
#startupequity
Annie Webber
Founder and CEO
LegalHero
David Ehrenberg
Founder and CEO
EGFS

2. Warning: a lawyerly thing to say
The information contained in this presentation is intended to serve as
general background information on legal matters relating to starting a
business. The included information does not establish an attorney-
client relationship between you and Legal Hero or Early Growth
Financial Services and is not a substitute for legal advice. Prior to
taking any action, we encourage you to contact a lawyer.

3. What we’ll cover today
1. Issuing Equity: Why to share the pie
2. Overview of equity grant types
3. Stock Options vs. Restricted Stock vs. RSUs
4. 83(b) Elections
5. NSOs vs. ISOs
6. Structuring considerations
7. Valuation

4. Issuing Equity: Why to share the pie with employees
Attract Talent Retain Talent
Align Incentives
In the startup context, nothing matters more than attracting and retaining the right
people to establish and grow your business, and you want them laser-focused on
that growth.

5. Overview of Equity Grants
Stock Options The right to purchase shares in the future at a price
specified on the date of the grant
Restricted Stock Shares granted subject to certain restrictions
Restricted Stock Units Units that represent the right to receive shares,
subject to certain restrictions
Stock Appreciation Rights Bonus plan that grants the right to receive cash or
stock based on the increase in the value of stock over
a period of time.
Phantom Stock Plan Bonus plan that grants the right to receive cash or
stock based on the value of shares, to be paid out at
the end of a certain period.

6. Options vs. Restricted Stock vs. RSUs
Stock Options
The right to purchase shares in
the future at a price specified
on the date of the grant
Restricted Stock
Shares granted subject to
certain restrictions
Restricted Stock Units
Units giving the right to
receive shares, subject to
certain restrictions
What is it?
Value
Payment
Voting
Rights/Dividends
Tax
Mostly
seen in…
Why?
Depends on increase above
exercise price
Depends on stock price at
vesting
Depends on stock price at
vesting
Payment of exercise price No payment to receive shares No payment to receive shares
Upon exercise Yes, even during vesting period No, but co can choose to give
div-equivalent bonus
Taxable at exercise for NSOs &
ISO’s (AMT) and at share sale for
ISOs
Taxable at vesting (unless
83(b) is filed)
Taxable at vesting
Early stage, high-growth
startups
Co-founder arrangements More mature companies/later
stage startups, esp those with
liquid stock
Significant upside as valuation
rises; ability to time taxation
for employees
Value of company close to nil
when stock distributed, so
lower downside risk
Taxes due at vesting, but more
mature stock sale can support
payment required

7. IRC section §83(b): What you need to know
• Letter you send to IRS to inform that you’d like to be taxed on your equity on the
date of equity grant rather than date equity vests
• Filing must be within 30 days after date of restricted stock grant and must be
attached to tax return
• Section 83(b) elections are applicable only for stock subject to vesting
• Filing 83(b) advantages:
o Can save you money
o Help you avoid tax hit from vesting stock
o Gets you long-term capital gains rate (if shares are sold more than a year after
exercise and 2 years from date of grant)
• Consult with your tax consultant!
If restricted stock is nominal, you should file 83(b). If your restricted stock is worth
larger amounts, filing an 83(b) may trigger a big tax bill.

8. Stock Options: NSOs vs ISO
Difference lies in tax implications.
In general...better to have ISO:
• More flexibility with tax strategy
• Lower tax burden
• When exercising options, stock owner doesn’t have to pay
ordinary income tax on difference between exercise price and
FMV of issued shares.
ISO = Incentive Stock Option NSO = Non-Qualified Stock
Option

9. Structuring equity: What is vesting and how does it work?
What is vesting? The process by which a grantee accrues non-forfeitable
rights over equity.
The “Schedule”: the total time period over which the equity is to vest in
installments (i.e. quarterly over 3 years, or monthly over 4 years)
The “Cliff”: the time period that must pass before any of the founder’s stock
vests.
4 year schedule (monthly), with a one year cliff
So what’s market for employees?
Vesting protects companies from founders and employees that leave early.

10. Structuring equity: Other considerations
Transfer
restrictions
Right of first
refusal (ROFR)
Repurchase
rights
Accelerated
vesting
What it does
Why people care
Determines when
stock may be sold
or otherwise
transferred
Gives company
right to buy stock
that’s being
transferred
Gives company
right to buy back
stock
Accelerates
vesting upon
certain events,
like acquisition or
fired without
cause
Co-founders
don’t want to
share company
with strangers
Stockholders
don’t want to
share company
with unknown
parties
Company may
want to control
who can hold
onto stock
Co-founders and
employees want
to realize full
economic
benefits
How it works Holder can’t
transfer stock
except for in
certain
enumerated
cases
Company has
dibs on matching
price and buying
stock that
otherwise will be
transferred to
third party
Company can buy
back stock at
specified prices
(usually FMV for
vested stock,
unless
terminated for
cause) and at cost
for unvested
stock)
Upon certain
events, all
unvested stock
becomes fully
vested (either
single or double
“trigger”)
Termination
Provision
Unvested stock
and options
automatically
forfeited; vested
options subject
to adjusted
expiration
When
employment
ceases, vesting
discontinues;
depending on
circumstances of
exit, expiration
date is adjusted
Company stock
should be held by
current
employees
contributing
toward growth

11. What is a 409a valuation
• IRS requires Fair Market Value (FMV) analysis in
conjunction with stock option grants
• Why? To ensure that federal income taxes are paid on stock
issued as a part of deferred compensation plans
• Valuation must be performed by “qualified individual”
• If you plan on selling your business or raising capital,
investors and acquirers will request an audit

12. What impacts your 409a valuation?
Company milestones
IP
The industry’s competitive dynamics
Strategic partnerships
Your investor base
The quality of your management team

13. When do you need a 409a valuation?
• Significant business event
• Material change in company value
• Prior to issuing stock options or other equity
• Annual renewal (every 12 months)
• External request from Board, investors, etc.
Keep in mind service provider requirements –
don’t wait until the last minute!

14. The 409a valuation process – due diligence process
• GAAP Financial Statements
• Capitalization Table
• Articles of Incorporation
• Option Schedule
• Warrant Agreements
• Debt Agreements
• Balance Sheets
• Income Statement
• Financial Projections
• Old Valuation Reports
• Business Presentation

15. Thank you!
Questions?
Annie Webber
annie@legalhero.com
www.legalhero.com
@legalheroinc
David Ehrenberg
contact@earlygrowthfinancialservices.com
www.earlygrowthfinancialservices.com
415.234.3437
Follow us @EarlyGrowthFS