You Should Only Sell Stock to Accredited Investors

If you are a founder of a startup, you may have heard this before. You may not know what an accredited investor is, or you may not understand why it is incredibly important to only sell stock and notes to accredited investors. Here’s a quick primer on selling your startup’s securities.

Securities Laws

You’ve probably heard of the “Securities Laws.” Securities laws are the federal and state laws and regulations that govern the sale of securities, i.e., stocks, notes (including convertible notes), and other financial instruments. The securities laws are very complex, so I’m going to try and simplify what you need to know as regards accredited investors, however there are many other aspects of the securities laws you need to take into consideration. [Read more…]

How to Value Stock Options in a Private Company

Many founders have questions about how to value stock options and around Section 409A. The following is a primer to help them.

Why is it important to accurately value stock options?

Under Section 409A of the Internal Revenue Code, private companies (such as tech startups) must determine the fair market value of their stock when they set stock option exercise prices (or “strike prices”) in order to avoid early income recognition by the optionee and the possibility of an additional 20% tax prior to option exercise.  Since most companies want to avoid these tax problems for their option holders, it is important to value the options correctly. [Read more…]

Founder Stock Vesting

Have questions about founder stock vesting? then read on to learn more about what it is and what market terms look like.

What is founder stock vesting?

When we say founder’s stock “vests”, we typically mean that the founder or founders of a company have granted the company a “repurchase right” to their stock that diminishes over time in exchange for the founder’s continued employment or association with the company.  Note that stock options can also vest, but here I am only discussing the vesting of actual stock, rather than options.

It might work like this: A founder purchases 1 million shares of stock in the newly formed corporation subject to an agreement that gives the company the right to purchase the shares back if the founder leaves the company. If the founder remains associated with the company, after one year from the date of purchase the repurchase right has diminished so that it only extends to 75% of the originally-purchased stock, after two years it only extends to 50%, three years 25%, and after four years the repurchase right is extinguished and the founder owns the shares free and clear. What “vests” over time is the right of the founder to leave the company and keep the purchased stock. [Read more…]

Should I Buy Stock with IP?

When founders of a company buy their initial shares of stock in a newly formed corporation, sometimes they wish to do so by exchanging intellectual property (IP) such as a business plan or a website, or other types of property (the below applies to many types of property, not just intellectual property). Purchasing stock with property raises a number of issues and risks that need to be addressed. This post is intended to help founders evaluate the issues when they buy stock with IP. [Read more…]

Catapult 2013 – Tools for a 21st Century Legal Career

I’ll be speaking at the upcoming Catapult 2013 conference to be held in San Francisco on April 13, 2013. [Read more…]