[cj]

Founders stock works well for early employees.

Since valuations of pre-series A companies is effectively $0, the cost for employees to buy their shares upfront is minimal (literally a few dollars for a few percent).

But as a company raises capital, it's legally required to have a "409a valuation", which establishes the "fair market value" of the stock. Once this happens, it can cost $x,xxx's of dollars for employees if they're given founders stock (restricted stock) upfront, compared to stock options that have no upfront cost.

One solution to this is to give employees a signing bonus to buy the restricted stock upfront, so it cancels out the amount they owe upfront. Alternatively, you could grant stock options, and sign something that says the company will give them a bonus equal to the exercise price of the options.

[AndrewKemendo]

100% correct. We hope that we will be able to float those amounts to the employees (as bonus) as we get to later stages of growth, but what I have discussed with our GC looks closer to the conversion bonus when and if that happens.

The boundary cases where there is a contentious firing will have to be taken case by case but then whatever that portion of the taxes are due for the percentage vested we would compensate the bonus as though it was 100% vested based on the agreement.

[hkmurakami]

I was thinking about the exact same model the other day (even to the point of paying new hires a signing bonus to cover the stock purchase + tax liability). The wall I ran into was how long I would be able to continue such a model -- how big of a bonus would I be willing to dole out? 20k? 50k? 100k?

If switching to a stock options at some point, what is the proper time? Post-A/B round? (obviously a nice problem to have if you have to worry about such things)

Would be keen on discussing it further sometime, since we seem to have arrived at the same conclusion independently.

[AndrewKemendo]

Like you, I don't have a good answer yet.

I think as long as we have the goal of equity = ownership instead of options to own we will figure out how to structure it. Sounds silly but it is fairly innovative/progressive stuff we are trying to do - which is our whole goal anyway to innovate and progress.

[ganeumann]

Remember, the part of the bonus used to buy the stock comes right back to the company, it's just one pocket to the other.

The tax piece is out the door (and is mostly a dead-weight loss if the company doesn't make it, one of the rationales behind options.)

[hkmurakami]

Wow I completely overlooked this fact.　Thanks!