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Equity Compensation

Rick LucashMcCarter & English, LLP

265 Franklin StreetBoston, MA 02110

617-449-6568rlucash@mccarter.com

@ricklucash

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Twitter Info

Tweeters! Tonight's hashtag is #BizSpark I am @RickLucash from @McCarterEnglish presenting at @DogpatchLabs #Cambridge

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Presenter: Rick Lucash

♦ LaunchPad angel group co-founder

♦ Attorney with law firm of McCarter & English– Member of Emerging Tech Company group

Focus on emerging tech companies Organization; Financing IP Employment and Operational Matters

– The firm is full service and handles all issues including tax; immigration; litigation; other

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OVERVIEW

♦ How– Founders Stock– Restricted Stock– Options

♦ Numbers– What’s “typical”

Key team members Rank and file Directors and Advisors

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TWO CHOICES

♦ “Restricted” Stock

♦ Options– ISO’s– Nonqualified Options

♦ Caution – Employment Law – not a substitute for hourly/weekly wages for employees

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RESTRICTED STOCK

♦ Stock that is subject to vesting– All or some

♦ “Forfeit” unvested stock if leave the company

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VESTING

♦ Vesting usually based on length of service– Example: 25% after 12 months

Then 36 monthly installments

♦ Can base on Milestones

♦ Retention Technique– “Retention Grants” – additional grants

periodically so employee always partly vested

♦ Partial Vesting only on Liquidity?

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ACCELERATED VESTING

♦ Avoid for people you want to keep after sale of company– Key players may demand

♦ Rank and file often do not get, either

♦ May accelerate only some of equity

♦ “Double-trigger” – change of control + termination

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RESTRICTED STOCK – TAX

♦ Tax on value as it vests – BAD

♦ “83(b) election”– 30 days to do– Pay tax on value when received– Then NO more tax until sell

And good shot at (low) long term cap gains rate

– Do you feel lucky?– So works best when value is low

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OPTIONS

♦ Right to buy stock in future at a price set today

♦ “Strike Price” and 409A– Consultants who do 409A valuations for

emerging companies

♦ Vesting– Similar issues as with restricted stock

♦ ISOs (no tax on exercise) vs. nonquals– More important for companies going public

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OPTION CONUNDRUM

♦ “Use it or lose it” if leave the company

– Vested options terminate short time after leaving company Cost to exercise Tax on exercise

– Unvested options evaporate

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OTHER CONSTRAINTS

♦ Voting obligations

♦ First refusal

♦ Co-sale (“Tag-along”)

♦ Drag-along

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HOW MUCH?

♦ Target for VCs is 20% for the “sweat equity” (including founders)

♦ “Percent of the company”– What’s the denominator– “Full diluted”– Use for initial key hires

♦ Brackets for the rest – target a fraction/multiple of salary (based on current value)

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TYPICAL NUMBERS

♦ Hard to find data sources

♦ Compstudy.com – only for participants– Cuts data many ways – founder/nonfounder by

position; no. of rounds, etc.

♦ Askthevc.com 6/4/2007 post

♦ Angelblog.net (Canadian): data on boards/advisors

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NUMBERS, CONTINUED

♦ Be conservative – you can always give more, but not less (see Alice in Wonderland)

♦ Askthevc.com data – Median for range of companies

• FOUNDERS NONFOUNDERS♦ CEO 9% 5% ♦ COO 5% 1.5%♦ CFO 2.5% 1%♦ CTO 4% 1%♦ VP Sales 3.5% 1%

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(even) MORE NUMBERS

♦ DIRECTORS 1.5 – 2.5%

5 – 6% for active chairman

Calculated around end of angel funding

May “top up” as get diluted by investors

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Equity Compensation

Questions?Rick Lucash

McCarter & English, LLP

265 Franklin Street

Boston MA 02110

rlucash@mccarter.com

@ricklucash

www.mccarter.com