Comments on: What’s the difference between an ISO and an NSO? http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/ Venture capital, seed financings, convertible note bridge debt, M&A, option vesting and other matters explained for founders and entrepreneurs Tue, 10 Aug 2010 22:20:47 +0000 http://wordpress.org/?v=2.9 hourly 1 By: Yokum http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/comment-page-1/#comment-2960 Yokum Wed, 16 Dec 2009 11:49:11 +0000 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/#comment-2960 @Raghavan - see this post <a href="http://www.startupcompanylawyer.com/2009/01/08/what-do-you-need-to-do-before-you-quit-your-job-to-form-a-startup-company/" rel="nofollow">http://www.startupcompanylawyer.com/2009/01/08/...</a> @Raghavan – see this post http://www.startupcompanylawyer.com/2009/01/08/...

]]> By: raghavan1 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/comment-page-1/#comment-2959 raghavan1 Wed, 16 Dec 2009 11:38:12 +0000 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/#comment-2959 Thanks, Yokum! Is there any way you could expand on your comment 'if he has a day job, there may be limitations on his ability to purchase stock'? Can NSO be assigned to a non-employee who may be an advisor to the start up but may have a full time job elsewhere? Thanks again. Raghavan Thanks, Yokum! Is there any way you could expand on your comment 'if he has a day job, there may be limitations on his ability to purchase stock'? Can NSO be assigned to a non-employee who may be an advisor to the start up but may have a full time job elsewhere? Thanks again. Raghavan

]]> By: Yokum http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/comment-page-1/#comment-2948 Yokum Wed, 16 Dec 2009 04:49:11 +0000 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/#comment-2948 @Raghavan - see this post <a href="http://www.startupcompanylawyer.com/2009/01/08/what-do-you-need-to-do-before-you-quit-your-job-to-form-a-startup-company/" rel="nofollow">http://www.startupcompanylawyer.com/2009/01/08/...</a> @Raghavan – see this post http://www.startupcompanylawyer.com/2009/01/08/...

]]> By: raghavan1 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/comment-page-1/#comment-2947 raghavan1 Wed, 16 Dec 2009 04:38:12 +0000 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/#comment-2947 Thanks, Yokum! Is there any way you could expand on your comment 'if he has a day job, there may be limitations on his ability to purchase stock'? Can NSO be assigned to a non-employee who may be an advisor to the start up but may have a full time job elsewhere? Thanks again. Raghavan Thanks, Yokum! Is there any way you could expand on your comment 'if he has a day job, there may be limitations on his ability to purchase stock'? Can NSO be assigned to a non-employee who may be an advisor to the start up but may have a full time job elsewhere? Thanks again. Raghavan

]]> By: Yokum http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/comment-page-1/#comment-2946 Yokum Tue, 15 Dec 2009 05:13:19 +0000 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/#comment-2946 @Raghavan - I would just issue and sell common stock to him at the same price as other founders. Please keep in mind that if he has a day job, there may be limitations on his ability to purchase stock. @Raghavan – I would just issue and sell common stock to him at the same price as other founders. Please keep in mind that if he has a day job, there may be limitations on his ability to purchase stock.

]]> By: raghavan1 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/comment-page-1/#comment-2945 raghavan1 Tue, 15 Dec 2009 03:25:59 +0000 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/#comment-2945 Hi Yokum,<br>This is a great forum with full of useful info. We're forming a C type company. A person who has been contributing since the pre-incorporation days wants to invest in the equity just like other co-founders and then be a consultant. He is not an accredited investor. We need him but he doesn't want to be an employee or board member. Is it possible for the company to go with him? Will the stocks given to him all be NSO? Thank you very much - Raghavan Hi Yokum,
This is a great forum with full of useful info. We're forming a C type company. A person who has been contributing since the pre-incorporation days wants to invest in the equity just like other co-founders and then be a consultant. He is not an accredited investor. We need him but he doesn't want to be an employee or board member. Is it possible for the company to go with him? Will the stocks given to him all be NSO? Thank you very much – Raghavan

]]> By: Ken http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/comment-page-1/#comment-2889 Ken Fri, 11 Sep 2009 16:21:49 +0000 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/#comment-2889 I think I've learned enough now to answer my own question: Assuming that the FMV of the stock isn't measured in pennies, then options aren't well suited for direct compensation (although they still work fine as a "bonus" for employees). The stock would have to double in value to provide the intended compensation. Stock grants are no good, either, because they will have large tax consequences. The solution is to issue warrants priced at $0.01 per share, which can be done legally regardless of the current FMV of the stock. Of course, thanks to the ridiculous IRS position of them wanting taxes before the stock is actually sold (!!), it normally won't make sense to exercise the warrants until you can sell at least some of them to cover the tax bill (just like options, except possibly ISOs with their special tax treatment). I think I've learned enough now to answer my own question: Assuming that the FMV of the stock isn't measured in pennies, then options aren't well suited for direct compensation (although they still work fine as a “bonus” for employees). The stock would have to double in value to provide the intended compensation. Stock grants are no good, either, because they will have large tax consequences. The solution is to issue warrants priced at $0.01 per share, which can be done legally regardless of the current FMV of the stock. Of course, thanks to the ridiculous IRS position of them wanting taxes before the stock is actually sold (!!), it normally won't make sense to exercise the warrants until you can sell at least some of them to cover the tax bill (just like options, except possibly ISOs with their special tax treatment).

]]> By: Ken http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/comment-page-1/#comment-2886 Ken Wed, 09 Sep 2009 05:01:16 +0000 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/#comment-2886 I'm not quite clear on that response. You seem to be saying that warrants would never be used to compensate contractors, but rather NSOs?<br><br>As a contractor considering receiving a percentage of my compensation as equity, I'm confused about the idea of receiving options in lieu of cash. It seems to me that I should be granted stock in exchange for cash I don't receive, not the option to buy stock. I understand that an option to buy later at today's price has some value, but that value is not necessarily related to the current price. In other words, if I'm owed $100, then 100 options to buy stock at $1.00 isn't necessarily a fair alternative to $100 cash. The stock value would have to double before I could hand over $100 in order to get $200 back, netting $100.<br><br>It seems like the original poster above was indeed trying to figure out how to compensate contractors with stock. In your response section 5, are you suggesting a stock grant? And that couldn't be done until the Series A, and would be treated as taxable income? I'm not quite clear on that response. You seem to be saying that warrants would never be used to compensate contractors, but rather NSOs?

As a contractor considering receiving a percentage of my compensation as equity, I'm confused about the idea of receiving options in lieu of cash. It seems to me that I should be granted stock in exchange for cash I don't receive, not the option to buy stock. I understand that an option to buy later at today's price has some value, but that value is not necessarily related to the current price. In other words, if I'm owed $100, then 100 options to buy stock at $1.00 isn't necessarily a fair alternative to $100 cash. The stock value would have to double before I could hand over $100 in order to get $200 back, netting $100.

It seems like the original poster above was indeed trying to figure out how to compensate contractors with stock. In your response section 5, are you suggesting a stock grant? And that couldn't be done until the Series A, and would be treated as taxable income?

]]> By: Yokum http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/comment-page-1/#comment-1951 Yokum Thu, 12 Feb 2009 05:51:57 +0000 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/#comment-1951 @LJ - There is no such thing as a "standard" option plan for an LLC, so it's hard to generalize without seeing the actual documents as it depends on what kind of LLC interest was granted. Please ask your own lawyers who set up the option plan and the operating agreement. @LJ – There is no such thing as a “standard” option plan for an LLC, so it's hard to generalize without seeing the actual documents as it depends on what kind of LLC interest was granted. Please ask your own lawyers who set up the option plan and the operating agreement.

]]> By: LJ http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/comment-page-1/#comment-1949 LJ Wed, 11 Feb 2009 14:08:47 +0000 http://www.startupcompanylawyer.com/2008/03/05/whats-the-difference-between-an-iso-and-an-nso/#comment-1949 We have a non qualified stock option plan for an LLC. Vesting and exercise was to occur at a liquidation event such as an acquisition or sale, which we thought might occur within a year, to alleviate the possibility of low level employees vesting and exercising options and becoming a member of the LLC and accompanying tax issues - K-1's etc. As our time horizon is growing, we wanted to include a 3 year vesting period. Question is, upon vesting, would our employees face a taxable event. We did have a valuation done, and the exericise price was set above the value at grant date to avoid any 409a issues. We have a non qualified stock option plan for an LLC. Vesting and exercise was to occur at a liquidation event such as an acquisition or sale, which we thought might occur within a year, to alleviate the possibility of low level employees vesting and exercising options and becoming a member of the LLC and accompanying tax issues – K-1's etc. As our time horizon is growing, we wanted to include a 3 year vesting period. Question is, upon vesting, would our employees face a taxable event. We did have a valuation done, and the exericise price was set above the value at grant date to avoid any 409a issues.

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