This article was originally published on Ryan Negri’s blog, on May 21, 2015.
For the last few months we’ve been working on incorporating Laicos (previously an LLC) and setting up the business properly, and legally. One portion of that has been creating a stock option plan for our staff. I can say, without question, that you learn more from experience than you do reading a TC article about it. The process was tedious. The most time consuming part was having to understand every little aspect. I was familiar with business setup and incorporation steps, but this is the first time I’ve established an option plan for my staff. We had fun.
I’m not going to offer any advice; as I said, this was the first time we’ve done this, but I will explain a little bit about what we did to complete it, and how it was issued.
First, we found ourselves an amazing startup attorney (last year). No, not a big-wig attorney from SV, but a startup attorney (whom we are recruiting for full time) who runs her own firm.
In order to incorporate, we either had to reestablish (start over) our company as Laicos, Inc, or convert Laicos, LLC to a corp. We decided to do the conversion, so that we could keep our EIN, bank accounts, payroll and anything else using our EIN. After that we had to dissolve our LLC in Nevada, and Florida, (where we were previously registered) however, we couldn’t dissolve our Florida LLC registration until the Incorporation process was completed in Delaware, which is where we chose to have the company registered. Here are some reasons why. In addition to reasons in that link, investors like seeing the DE registration (for, basically, the same reasons).
So now that we are an established Corp, and Nevada is dissolved, we had to register to do business in Florida, at the same time we were filling out the dissolution papers for Laicos, LLC in Florida. Lots of legal BS to go through in order to legally operate a business. #murica
All of that is now done, we are legal everywhere. Phew! Now, onto the legal internal documents, such as Corporate Minutes, Shareholder Consents, By-laws, Contribution & IP Assignment Agreements, Founders Agreements, & Subscription Letters. We also had new Confidentiality Agreements set up for the staff. Removing paragraphs like “you can’t work for anyone like us for a year”, and other BS we couldn’t control, even if we tried. But, I’m not going to get into those; Google them if you’re curious. They are all very interesting, but they’re another story to tell. (Oh, one tip, don’t try to act hard with your internal legal docs.)
On to the ESO’s. First, we needed to put together a Stock Option & Equity Incentive Plan, which we did. It was quite complex, but easy to understand and created relatively quickly (because we hired the right attorney). For this, we needed to set an initial (strike) price on the shares we were issuing, which involved doing a valuation for company. Next, the stock option agreements needed to be created. This is the agreement issued to staff that explains how many options are being issued to them, what it will cost them, what type of options, the vesting schedule, grant, exercise, non-transferability, lock up period, representations, tax obligations and more. (Google it, or ask me for the template.) Before we were able to fill this out, we had to put some serious thought into what to offer each member of the team. It’s important they understand what you feel they are worth, in addition to their salary. We looked at a multitude of factors, including; time with the company, skills and expertise, future value/worth, current salary, and how much we like them overall (kind of kidding). Once we decided what to offer, filling out the docs was a cinch – again, because we had tremendous guidance from our attorney.
Now, the delivery. No one at the company knew they were receiving options on Friday, so to celebrate the occasion, we also ordered a 24″ pizza so everyone could have a “piece of the pie”. While everyone was finishing up eating, I told them of our intention to offer stock options, and a few reasons why. Following the celebratory silence…I started a presentation on Stock Options, cleverly named ‘Stock Options 101’. It was a simple slideshow I created to explain the basics about stock options, what they are, what they are worth, what they will be worth, what the costs are, tax obligations, and reasons they were issued. After knowing what they were, they seemed to be a little more excited. I think someone even clapped.
Overall, I feel everyone left the room happy and motivated (and full), and I think going forward everyone will feel more a part of what we are building than they ever did before. And that was the goal. Don’t get me wrong, we have a passionate group here, but now they can see some value created by their efforts. That’s a different mindset than a salary-only employee – and that’s a good thing.
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