Advisor Equity · Business Development

How to negotiate Companies Stock (Common and or Preferred)

Anonymous

November 9th, 2017

I have bee an advisor/investor to a startup, for almost a year. The CEO/Founder is willing to grant me (as all of his employees and other advisors) Stock. ( aside from my investment) However, this Common stock is subject to approval by company's board of directors, to gran the option to purcahes common stocks from the company. This situation is very one sides as the company after all the time vested unilaterally can deny to gran you the stock. What would be the correct way to negotiate this?

Fred Davis Helps startups start up. Mentor: UploadVR & Runway

November 9th, 2017

It's not one-sided at all. This is standard language. The board has to approve things like that, but if you have the stock (or option) purchase agreement it will be fine. If the board were to deny a signed stock agreement it means they are corrupt and you shouldn't be working with the company if you think that they are that corrupt.

Dane Madsen Organizational and Operational Strategy Consultant

November 10th, 2017

Fred is right. This is standard and part of corporate governance. To do it any other way would be destructive to the company. It is highly unusual for a grant to be declined by the Board. It can occur if 1) they do not trust the CEO as the person that recommends the grant or 2) they do not think you add value (and question the CEO for recommending the grant). If they do decline for either reason you should terminate your role with the company.

Curt Sahakian Attorney

Last updated on November 10th, 2017

In the U.S. you don't own the stock for tax purposes until it can no longer be taken away from you. If the stock appreciates during this period you can be stuck paying tax on phantom income. It is very painful to pay tax on income which you never receive.


Do a search on

26 U.S. Code § 83 and also on

409a valuations


Forget the illiquid stock. Get something that will pay you real money calculated on a formula derived from gross income (as reported to the local taxing authority) over some period of time. Make sure you have some business record inspection rights to ensure compliance.


If the equity is really important to you, supplement this with a SAFE investment agreement or perhaps fully vested warrants.


Whatever you do, make sure you get a board record of action authorizing your agreements and make sure that is signed by all the board members.