Equity Incentive / Option Plan Setup

Service description

Equity incentive plan setup builds the legal framework for granting stock options or other equity to employees and advisors. A lawyer drafts the plan document, sets the share pool, prepares the grant agreements, and arranges the board and shareholder approvals the plan needs. The plan is also structured to fit the federal securities exemption for compensatory grants and the tax rules for incentive stock options and deferred compensation.

Common industries

Applies to venture-backed startups and any private company that pays in equity.

ROI

A clean plan set up right avoids expensive fixes at diligence and protects both the company and employees; pairs with a 409A valuation.

Benefit

Establish a legally sound equity incentive plan — option pool, grant docs, and governance — so you can hire and retain with equity.

Why get it

Equity is often how a young company competes for hires, and a plan with defective approvals or grants invites expensive fixes when investors or buyers review the company's records.

When you benefit

Mostly a one-time setup, refreshed when the share pool runs low or a financing changes the terms.

What it costs

Typically a flat fee.

When you pay

Counsel usually quotes a flat fee for the plan and standard grant documents, and bills hourly for custom terms or more than one plan. Payment is often split between a deposit at the start and the balance on delivery of the finished documents.

Other costs

A 409A valuation to support the option strike price, and any securities filings the plan or the grants require. Per-grant paperwork after launch may be billed separately.

Risks to know

Granting options before the plan is properly approved, or at a price below fair market value, can cost employees favorable tax treatment and trigger additional tax under IRC §409A. Grants to people outside the plan's eligible groups, or beyond the limits of the securities exemption in Rule 701, can create securities-law problems for the company.

When risks arise

Each problem is set at the moment of a grant, but it usually surfaces years later, when an employee exercises, or when the company raises money or is sold and a lawyer reviews every grant.

The process

The provider reviews the cap table and charter, then drafts the plan, the grant agreement forms and the approvals. The business reviews and revises the terms, and the board and shareholders adopt the plan. The provider delivers the signed documents and the steps for making each grant.

Your commitment

The business shares its cap table, charter and any approvals to date, and decides how large the share pool should be and who will receive grants. It should settle vesting terms and eligible recipients early, and line up the board and shareholders to approve the plan.

Documents to gather

• Current cap table and a list of equity already granted
• Certificate of incorporation and bylaws
• Board and shareholder approvals adopted to date
• List of intended recipients with their roles

Helpful reading

• Everything You Need to Know About Stock Options and RSUs — Harvard Business Review
• Equity incentive plan considerations for startup companies — The Tax Adviser
• stock option — Legal Information Institute, Cornell Law School (Wex)

Further research

• 26 U.S. Code § 422 — Incentive stock options
• 26 U.S. Code § 83 — Property transferred in connection with performance of services
• 26 U.S. Code § 409A — Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans
• 17 CFR § 230.701 — Exemption for offers and sales of securities pursuant to certain compensatory benefit plans and contracts (SEC Rule 701)
• IRS Topic no. 427 — Stock options