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Equity Compensation 101
By Gary T. Moyer, April 11, 2000
Disadvantages
- Founders need to come to grip with the fact they are giving up a piece of "their baby"
- The rules are complex, and the tax (mostly to the employee) and financial accounting consequences (to the Company) of failing to follow those rules can be severe
- Valuation of privately held companies is not a science - so there is little certainty the IRS will respect the value given to the equity compensation
- Given the lack of risk to the employee, there is a disparity between the risk and reward of the employees versus the founders
- Company founders may mandate that the Company reacquiring the stock when the fully vested employee terminates employment
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