Understanding equity compensation is crucial as you prepare to grow and scale your team. Learn how to create an equity plan that’s both attractive to new hires and promotes retention. We’ll discuss best equity compensation practices from a legal and accounting perspective when hiring, firing and incentivizing your team that will align with your startup’s fundraising and growth goals.

1. Designed for entrepreneurs, by
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Employee Compensation & Equity
Preparing For Growth
William J. Bernat
@willbernat
Chris Lindstrom
@NutterLaw

3. • Nutter: Partner; Co-Chair, Emerging Companies Group
o Represents companies in the following industries: technology, life sciences,
consumer/retail, and food & beverage
o Counseled clients in angel and venture backed financings representing an
aggregate of over $100 million in investment in local early stage companies.
• The Capital Network: Partners’ Committee
• MassChallenge & Golden Seeds: Mentor
• Providence College, B.A., summa cum laude
• Suffolk University Law School, J.D. , magna cum laude
Will Bernat
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4. • Nutter: Partner; Litigation Department
o Has experience in complex civil litigation matters
o Often advises on the development and implementation of nationwide and local
non-compete strategies.
o Founder & Co-Editor, Nutter’s Non-Compete Blog
• American Bar Association, Editor, Business Torts Subcommittee Journal
• Middlebury College, B.A.
• Columbia Law School, J.D. , James Kent and Harlan Fiske Stone scholar
Chris Lindstrom
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5. •Goal is to Provide You Sufficient Information to
Spot Issues
•Emerging Companies and Employment Laws
•Massachusetts Does Not Make It Easier
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OVERRIDING CONCERNS

6. •Employees v. Independent Contractors: More
than a label
− Free from control or direction
− Outside your business
− Independent operation
•Offer Letters v. Employment Agreements
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HIRING EMPLOYEES

7. • What is it?
− Tool to allow holder to participate in the appreciation of the value of the
company as the company matures and exceeds
• Why should I consider it?
− Often necessary to attract top tier talent
− Startups often can’t pay market salaries in cash or provide market level
benefits
− Equity compensation is used to make up difference by providing
potential for big pay day
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EQUITY – ATTRACT AND RETAIN

8. • Vesting
− Crucial for retaining employees/service providers
− Requires employees/service providers to remain with the company for
agreed upon length of time in order to get full benefit of equity
compensation
− Typical – 25% after 1 year, and then the rest ratably in periodic
(monthly/quarterly) installment over the remaining 3 years
− Can be tied to milestones
• Acceleration
− Single Trigger
− Double Trigger
− Termination without Cause/for Good Reason
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EQUITY – ATTRACT AND RETAIN

9. • Restricted Stock/Restricted Units
− Recipient receives shares of Stock/Units
− Typically has same rights as other shareholders
− Subject to risk of forfeiture (“reverse vesting”)
− Taxable upon vesting (or earlier filing of 83(b) election with IRS)
• Stock Options
− Right to purchase stock in the future at a price set today
− Not a stockholder until option is exercised
− Non-qualified stock options vs. Incentive stock options
− Taxable upon exercise
− Strike price must be at least equal to FMV
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EQUITY – COMMON TYPES

10. • Profits Interests
− Only available for LLCs
− Interest in the future profits and asset appreciation of the LLC (i.e.,
holders are only entitled to portion of value generated above the value
that existed at the time of issuance)
− Complicated; no corporate equivalent
− Holders treated as partners of the LLC (not employees)
− Usually not taxable on date of grant
• Others
− Phantom Stock
− Stock Appreciation Rights
− Exit Bonus Plans
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EQUITY – COMMON TYPES

11. Subject to
Vesting Tax at Issue Tax at Vesting
Tax at Exercise
Tax at Exit Voting
Stock No. Yes. (Ordinary Income) Not applicable – fully
vested upon grant.
No Yes. (Long-term capital
gains if held more than
1 year)
Usually
Restricted Stock Yes. No, unless a timely
section 83(b) election is
made.
Yes, unless a timely
section 83(b) election is
made.
No Yes. (Long-term capital
gains if held more than
1 year)
Usually
NSOs Yes. Not generally No, provided specific tax
requirements are met.
Yes, ordinary
income upon
exercise.
Yes. (Long-term capital
gains if held more than
1 year from NSO
exercise)
Not until stock issued
upon exercise
Profit Interests Yes. No, provided specific
tax requirements are
met.
No, provided specific tax
requirements are met.
No Yes. (Current safe
harbor requires two
year holding period)
Possibly
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EQUITY – IN CHART FORM

12. • Minimum Wage Always Required
− Stock Options and Equity Do Not Apply Against Minimum Wage
Obligations
• Deferred Compensation and Equity Arrangements Must Be in
Writing and Conform to Legal and Accounting Standards
− Pitfalls of Offering Even Minor Equity Stake
• Do Not Look to "Volunteers" for Free Labor
• The Question of Interns
• Ancillary Compensation Issues
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COMPENSATION

13. •Overtime and Exemptions
•Commissions and Bonuses
•Massachusetts Wage Act
− Treble Damages
− Attorneys’ Fees
− Personal Liability
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COMPENSATION

14. •New Hires’ Non-Compete with Prior Employer
•Non-Competes:
− What Are You Protecting:
◦Confidential Information
◦Customer Contacts
◦Competition
− State laws
− Non-Solicits
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NON-COMPETES

15. •Federal Defend Trade Secrets Act
•Assignment of Inventions
•Return of Property
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NON-DISCLOSURES AND
INVENTIONS ASSIGNMENT

16. •Handbook v. Stand-Alone Policies
•Required Policies (e.g., Sexual Harassment)
•Recommended Policies (e.g., Commissions)
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EMPLOYEE HANDBOOK

17. •Payment at Termination
−Vacation Pay and Other Wages
•Severance
•Non-Competes
•Precedent
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DEPARTING EMPLOYEES

18. • Equity is complicated, but EXTREMELY important. Take the time
(and $) to get it right the first time. Going back to clean it up later
is HARD and costs more $$.
• Plan the start of every employment relationship like it will end
horribly
• If you have to ask whether someone is an independent contractor,
he/she likely is not
• Pay minimum wage, even if you are deferring compensation or
providing equity
• Keep an eye on overtime issues
• Be reasonable with non-competes
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IF NOTHING ELSE, REMEMBER THIS: