equity-design

# Equity Design ## Strong Legal Caveat Equity is one of the most legally and tax-sensitive areas in HR. Every consequential decision requires employment counsel, securities counsel, and a tax advisor. The agent flags; specialists decide. ## Grant Philosophy by Stage | Stage | Pattern | |-------|---------| | Seed–Series A | Front-loaded; large grants; smaller team gets meaningful ownership | | Series B–C | Mixed; decreasing % per role; refresh becomes important | | Series D+ / pre-IPO | Smaller %, more dollar value; refresh annual | | Public | RSUs; smaller %; market price drives value; annual refresh | Document the philosophy. Communicate it to candidates and employees. ## Vesting Standard convention: 4 years total, 1-year cliff (no vesting until 12 months, then 25%, then monthly). Variants: - 4 years, 1-year cliff, monthly thereafter (most common) - 4 years, 6-month cliff (more recent variant) - 25/25/25/25 annual - 5 years (Amazon-style back-loaded) - 3 years, no cliff (sometimes for senior hires) Convention is convention, not law. Match the vesting to the role and need. ## Post-Termination Exercise Windows The 90-day post-termination exercise window for options is convention, not legal requirement. It disadvantages long-tenured employees: they have to come up with cash (and AMT for ISOs) to exercise within 90 days or forfeit vested shares. **Strong recommendation**: extend to 7 or 10 years post-termination. Pioneered by Pinterest, Asana, Quora; increasingly common. Caveat: ISOs convert to NSOs after 90 days post-termination (tax treatment changes). Document this clearly. ## ISO vs. NSO vs. RSU vs. Restricted Stock **Strongly summary-only; consult tax advisor.** | Type | Tax at Grant | Tax at Exercise/Vest | Notes | |------|--------------|----------------------|-------| | ISO (US only) | None | Spread potentially AMT | $100k/yr cap; favorable LTCG if held | | NSO | None | Ordinary income on spread | Broader applicability | | RSU | None | Ordinary income on vest | No exercise; standard at public | | Restricted Stock + 83(b) | Pay tax on grant value | None at vest | Cash outlay at grant | Errors are expensive and often permanent. Get qualified advice. ## 409A and Strike Price US private companies: strike price = 409A FMV (independent valuation). Implications: - Annual valuation typical; updated after material events - Can't grant below 409A - Strike rises as company values rise - Errors create severe employee tax liability ## Refresh Grants Why: - Original grant runs out (4 years) - Market value has diverged - Role grew beyond original level - Retention concern Design: - **Annual refresh** (typical at growth+): smaller annual grants with own vest - **Performance-tied**: ties to rating; risky if not calibrated - **Anniversary refresh**: at year 3 or 4 to bridge cliff Common failure: refresh ignored until employee threatens to leave. Reactive refresh = broken system. ## Equity at Funding Rounds - **Down rounds**: employee equity dilutes; refresh budget often increased - **Up rounds**: equity becomes more valuable; refresh philosophy holds - **Recapitalizations**: employee equity often hit hardest; counsel essential - **Bridge rounds**: signal of trouble; equity programs often paused ## Equity at Exit - **Acquisition**: vesting often accelerated (single trigger / double trigger). Read the docs. - **IPO / direct listing**: lockup periods (180 days typical); insider trading windows - **Tender offers / secondaries**: opportunity for employees to monetize; eligibility varies Communicate clearly to employees in advance. Surprises at exit are bad for trust and bad for retention. ## ESPP Employee Stock Purchase Plan (post-IPO): allows employees to buy stock at a discount (typically 15%) via payroll deduction. Strongly favorable for employees. Recommend for all qualifying public companies. ## Equity Communication Most employees don't understand their own equity. Solutions: - Annual statement: vested vs. unvested, current 409A, scenarios at multiple exit valuations - Pre-funding-round comms: how the round affects existing grants - Education programs: how equity works, tax basics - Tax-prep resources during exercise events ## Common Failures - No equity philosophy - Vesting mismatched to need - 90-day exercise traps - Refresh ignored - ISO/NSO tax mistakes - 83(b) elections missed - Equity grants employees can't model - Acquisition surprises - Recapitalizations that hit employees disproportionately ## Cross-References - `equity-architect` agent - `compensation-strategist` agent - `compensation-philosophy` skill - `legal-and-jurisdictional-boundaries` rule ## Key References - Holloway Guide to Equity Compensation (Levy & Wallin) - Industry practice from Carta, Pulley, Compensia - IRS guidance on Section 422 (ISOs), 409A