As most of you know, stock granted to employees follows a standard approach in Silicon Valley. Employees are granted incentive stock options with 4 year vesting. The first year has a cliff (meaning the employee needs to remain with the company for one year before they can exercise the first 25 percent of the option), and the remainder vests over the following 36 months or until termination of employment. The employee then has 90 days after termination of employment to execise.On the other hand, consultants work for companies in many different ways and there is not just one approach for granting stock or options. There are part-time consultants (like software design firms or people providing financial services to start-ups), full-time consultants (like software design engineers or interim CEO's), and each of these can work over a fixed or longer time period.For purposes of structuring stock options and stock awards, there are usually 3 alternatives which depend on the period of time the services are expected to be provided. 1. Short-Term Consultants - Services Provided in Less Than 12 Months. If a consultant is delivering a specific project (such as a software implementation or marketing project), or they are providing services over a short period of time (such as recruiting services), that person or company is usually granted shares of stock at the end of the project or monthly as they deliver services. They don't pay for the shares. Instead, they earn the shares for the services provided and you will report the shares as compensation on a Form 1099. In these cases, the shares take the place of cash that the company would pay for the services.The number of shares will be negotiated. And, you need to be careful not to tie the shares earned to cash that would be paid. Otherwise, you will jeopardize your common stock 409A price to employees. I will address how shares are calculated in exchange for cash in another article. 2. Medium-Term Consultants - Services Provided in Less Than 2 Years. Consultants in this category include persons such as those temporary financial services (like interim CFO's). They are usually granted options (NSO's or non-statutory stock options) over the expected period of service and without a cliff. For example, a part-time CFO could be granted an option that vests monthly over 24 months. These consultants sometimes receive cash for their services in addition to the option grant.3. Longer-Term Consultants - Services Provided Over an Undefined Time. Consultants in this category are usually just like employees, except they've structured their relationship with the company as a consulting relationship. This might be because they provide services to other companies at the same time, or they have their own organization that reports directly to them to provide the services. These consultants are granted options that vest over 4 years (as NSO's) with or without a 1 year cliff. These consultants almost always receive cash compensation in addition to their option grant. A couple of things to note that apply to all categories:1. All shares or options are for Common Stock and made under your stock plan. Do not grant shares of preferred stock or options on preferred stock. 2. All shares or options need to be granted at your 409A price and you should have a valuation firm regularly determine the price, except in very limited instances that I can discuss with you.3. All options have a period of 90 days after termination of services in which to exercise,
but this period could be longer if negotiated since these options are NSO's and exercise periods can be longer.4. How options are granted to Board members and strategic or technical advisors is another story that I will address in a future article.
I lead Orrick's Emerging Companies Group and advise emerging companies in formation, financing, licensing, acquisitions and public offerings. I've recently sold companies to Facebook, Google, LinkedIn, Salesforce, Twitter and Yahoo. Before joining Orrick, I was a co-founder of Venture Law Group and served as Mayor of the City of Cupertino. I am a graduate of Harvard Law School and UCLA.