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,
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.
advisors is another story that I will address in a future article.
