EquityZen Knowledge Center

EquityZen has curated this list of quality resources for secondary investors, shareholders and company representatives.
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Not So Obvious: Here's What To Know Between NSO and ISO Stock Options

EmployeeEquityStock Option

Nat Disston   May 18, 2017

The world of startup stock options can be pretty opaque. To outsiders, its seems all one does is join a small company, and, if it works, everyone becomes millionaires. For new employees, they often don’t know what they don’t know and are faced with piles of new documents and more questions once they join their budding business. Core to our mission is to help educate employees, companies, and their founders about their stock options and what they can do with their resulting shares.

We’ve had the good fortune of an engaged community of readers and this post is a direct response to a reader request. If you have anything you’d like to see discussed on these pages, please let us know! Here, we dive into a common point of confusion around ISOs (Incentive Stock Options) and NSOs (Non-Qualified Stock Options). But first…

What the heck is a stock option?

A stock option is a right to purchase a share of stock at a specific price within a specified period. Stock options are often used as long term incentive compensation for management and employees at high-growth companies. Once an employee exercises (buys) their stock options, they become stock in the underlying company. More on that here.

So back to the ISOs and NSOs. What drives the main point of confusion? You may have heard some discussion at the watercooler/ping-pong table that “ISOs have better tax treatment.” But with the labyrinthine American tax code, let’s circle above this topic at a few thousand feet.

Do ISOs really have better tax treatment? Maybe, but it’s not so black and white. ISOs are complicated because they can only be issued to employees (and not to contractors, lawyers, or outside vendors), must be priced at Fair Market Value (FMV, which is the same as a 409A valuation), and there are limits on how they vest and how much can vest in a given year (up to $100K). NSOs can be granted to anyone with no limit on volume or exercise price.

But Nat…which ones do I want???

(Disclaimer: I’m no tax expert and must advise you to speak to an accountant or financial advisor regarding your own situation.) NSOs are straight forward in that you must pay ordinary income tax on any gains at the time of exercise. If the current FMV is now $5 and your exercise price is $1 (FMV at time of grant), you pay ordinary income on the $4 paper gain. Furthermore, this tax event is withheld by your employer and may be tax deductible for them: another win for your employer. ISOs, on the other hand, don’t have any required tax at the time of exercise, which sounds nice but can be misleading. The fact is that exercising ISOs may make you subject to the AMT (Alternative Minimum Tax), which for most startup employees will be the case, and can lead to quite a surprise come tax season. Kind of like a club that has no cover charge at the door, but sells you $20 beers.

Still with me? We’re almost done! Remember: taxes are boring, but your taxes are important.

A commonality between NSOs and ISOs is that you will owe taxes when you exercise either type of options. Once the options are exercised, however, they are perfectly equal – stock in your company. This is important to note for EquityZen’s business, because they are treated the same way on the secondary market.

Conclusion

NSOs and ISOs differ in how they are taxed. And while there may be instances that ISOs have better tax treatment, each case is a little bit different. Fun Fact: a large part of EquityZen’s business is helping employees cover their exercise cost and subsequent tax bill, regardless of whether they’ve exercised ISOs or NSOs.
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From Finance to Tech: How to Pitch Yourself When Switching Careers

EmployeeCareerStartup

Phil Haslett   March 03, 2016

There’s a changing of the guard in New York. The financial and professional upside of a career in banking, sales and trading, or most other roles in institutional finance has diminished in light of the Financial Crisis of ’08. Smaller bonuses. Increased regulation. Less risk appetite. Did I mention smaller bonuses?

Thus, the opportunity cost of switching from finance to tech has dropped drastically. Time to join a startup! Hand me a ping-pong paddle and an Odwalla juice: let’s do this.

But…there’s a problem. You don’t know anything about the tech community, let alone anyone in it.

And you don’t know how to code.

And what’s all this stuff about MongoDB and Python and Ruby on Rails? Don’t people just use Excel?

At this point, you feel like you’re relatively….screwed. So you convince yourself that your soul-crushing, innovation-free, six-figure job is in fact a blessing, that the job market is terrible, and that your parents were right: it’s nice to have this kind of job security.



(Throws water in reader’s face) You’re better than that! Wanna get involved in the tech scene? Fortunately for you, this corner of the world spends 70% of its time tweeting the rest of the world what they’re doing, how they did it, and why they’re doing it. Secrets are shared: you can learn very fast.

The playbook

I switched. In fact, a lot of people switched. Turns out, it’s not unlike getting any other job: it requires:
  1. Research
  2. Networking
  3. Exhibiting passion in the subject matter
  4. Persistence
  5. Leveraging your current skillset
(At the bottom of this article is a list of resources.)

You can go about finding a job in two ways. You can try to leverage your sector-related skills. This may include:
  • Rolodex of institutional investors
  • Modeling skills
  • Understanding of financial markets, and large trade sizes
  • Understanding of the “pipes” behind financial markets (honestly, most of finance relates to pipes that connect one person’s dollar to another person’s wallet. Your job involved providing a service in exchange for a piece of that dollar)
Or, you can leverage your softer skills in a new environment. Examples:
  • You know how to navigate a 150,000 employee mega-bank and get things done
  • You have managed people (don’t overlook this. Most <20 person startups have little leadership experience)
  • You played a leading role in developing new products based on feedback from sales teams and technology teams

The Unsuspecting Product Manager

It turns out you may be more qualified than you think. When I’ve had this chat with current finance folks (about switching to tech), I usually hear something like “well I looked at all the jobs at Startup ABC and I wasn’t a good fit for any of them. I don’t even know what a Product Manager is.”

Really? But…didn’t you just tell me that you noticed some glaring inefficiency in how the Emerging Markets bond quotes were being routed to clients, and then worked with the sales team and your technology team on an enhancement? And then you got signoff from your management on the implementation worldwide? And then you tracked the cost-savings? And you used that as a template for future improvements?

Um, congrats. You’ve been a Product Manager masquerading as a trader for 5 years. 

Summary: you have a useful skillset, but you need to communicate it in tech/startup terms. 

I’m inspired! What should I do next?

Don’t just pin yourself to FinTech. Your skills are transferrable. And most companies (EquityZen included) hire for aptitude and fit, not on rolodex size and accomplishments.

HOWEVER, if you do want to go down the FinTech road, I get it. It’s familiar. It’s mostly in New York. Maybe other employees will empathize with the fact that you had to terminate your Brooks Brothers wardrobe and re-learn how to untuck your shirt.

Start with lists of top FinTech companies. As a shameless plug, check out the Forbes FinTech 50. I hear company #16 is the coolest.

Read Dan Primack’s Term Sheet. Every day. You’ll start to learn about different companies raising money. When companies raise money, they can usually afford you.

Read Connie Loizos’ StrictlyVC. Every day. She has a great roster of interviews with operators and investors. 

Subscribe to CB Insights. Awesome research, delivered to your email inbox. Bonus: it’s often in picture-form, saving you time (the tech industry calls that a “life hack”).

Learn about the main FinTech sectors: Payments, Lending, Personal Finance, Data.

Read from folks that successfully transitioned. Vinicus Vacanti (Founder of Yipit, came from private equity) and Adam Besvinick (VC at Deep Fork, came from banking).

And network. A lot. Alumni are the friendliest. 

Is that it?

Yup, that’s it. Just, read a lot, network, be persistent, re-vamp your resume, and work your a** off. Doesn’t sound much different than Finance, does it?

Resources

Sites for job postings in VC/Tech:
Leading Tech Blogs From Venture Capitalists:
Leading Tech Publications
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Shareholder's Playbook: What to Know About Selling Your Shares

EmployeeShareholderSellEquityLiquidity

Sharmila Achari   February 04, 2016

So you’re working at the pre-IPO company of your dreams….but you need some immediate liquidity. You’ve heard of platforms like EquityZen that help private company shareholders get liquidity for their shares, and you want to understand more about how the process works. Then this is the blog post for you!

It’s All About the Documents, Baby

The first step is understanding the documents related to your shares. For anyone looking to sell their shares, it is very important to understand the rights that the issuing company has with respect to those shares and what steps are necessary before the shares can be officially transferred.

Here is a short list of the most common documents you will encounter as a shareholder and what each document means (a more detailed list can be found here https://equityzen.com/blog/key-equity-documents-to-keep-on-file/): 

Option Documents
  • Stock Option Grant Agreement: This document sets out: (a) the number of options being granted to the employee, (b) the type of options (incentive stock options (ISOs) or non-qualified stock options (NSOs), (c) the exercise price, and (d) the vesting schedule for these options.  
  • Stock Option Plan: This is the governing document that describes the terms and conditions of your grant and is the same for each optionee. This document often contains the restrictions around selling or transferring your shares.
  • Notice of Stock Option Grant: A one page document describing the material terms of the stock option grant (It is not always included). 
Option Exercise and Stock Purchase Documents
  • Notice of Exercise: This document is filled out when you are ready to convert vested stock options into shares of the company (a.k.a. “exercise” the options). This document represents proof that you have exercised a specific number of options and shows the exercise price.
  • Stockholders Agreement: The governing document that contains the terms and conditions for owning shares in the company. Importantly, this document often contains the restrictions around selling/transferring shares in the company. The Stockholders Agreement will often set forth whether the company retains a “right of first refusal” (ROFR), the length of the ROFR period, and any other conditions that must be met before the company will permit the share transfer.
  • Confirmation of Exercise: This document is often provided by the company to a shareholder once the exercise of options is complete and you are now a shareholder. 
  • Stock Certificate/Stock Ledger: This one might seem obvious, but the stock certificate is the document issued by the company that evidences legal ownership of shares. However, since many companies do not issue physical certificates, such companies also maintain an internal stock ledger, which lists the names of all stockholders and the number of shares owned.  

Company Documents
  • By-laws: By-laws set out the day-to-day rules for the company’s organization and governance. By-laws can be important for startup employees because many companies have started including provisions in the by-laws that can materially affect your rights as a shareholder. Such provisions include restrictions on transferring your shares and any requirements that must be met before you can do so.  
Knowledge of the documents involved is an important tool for you when looking to sell your shares. In order for a platform like EquityZen to assist, we will need to: (1) establish that you legally own your shares and (2) understand what restrictions are imposed by the company before you can sell those shares.  Understanding the distinctions and information in the documents above can allow you to more effectively provide us with the information that we need and help get your shares sold faster.

Who You Gonna Call? 

Now that you have all your paperwork in order, the question becomes who can help you find a buyer and guide you through the share transfer process. In recent years, several platforms (including EquityZen) have arisen to meet the needs of startup employees in need of liquidity.  There are a variety of options out there from traditional brokerages to platforms like EquityZen. When considering selling your shares, it is important that the firm conducts share transfers in a manner that complies with the company’s stated policies as well as applicable securities laws. Platforms may also differ based on their minimum transaction size, the fees involved, as well as the level of service and professionalism offered. 

What are the Transfer Restrictions?

One of the key questions that we help you figure out is: “What needs to happen before I can sell my shares?” By reviewing your option and share ownership paperwork, we can guide you through the steps involved in the share transfer process and manage your expectations around timing of the sale.  Here are some common transfer restrictions that may be applicable to your sale:

  • Right of First Refusal (ROFR): Most private companies retain a “right of first refusal” (ROFR) over shares, which means that if a shareholder seeks to sell shares to a third-party, the company has the right to buy those shares back from the seller at the same price and terms that the seller offered to the third-party. Typically, when a seller submits a Transfer Notice stating their intent to sell a certain number of shares, this starts the ROFR Period, during which the company can decide whether or not it wants to buy back the shares. Typically the ROFR period will last between 30-60 days. If the company does not respond to the request within the ROFR period, or if it states that it will “waive the ROFR,” then you can proceed with your sale. Alternatively, if the company decides to “exercise the ROFR” and buy the shares back from you, then you still get your money. It’s a win-win!
  • Board Approval: In addition to a ROFR, some companies require approval from the Board of Directors before they will permit you to sell your shares to a third-party.  This restriction is usually contained in the By-laws or the Stockholders Agreement, if it is required by your company. Transfers requiring Board approval will often take a longer to complete because Board of Directors meetings only occur once a month or once a quarter. 
  • Legal Opinion: Some companies will also require you to provide an independent legal opinion stating that the sale of your shares will not violate any state or federal securities laws. If you don’t have an attorney you trust, a secondary marketplace can usually provide you a referral to an attorney who can provide this opinion for you. 
  • Transfer Fee: Some companies may require you to pay a transfer fee at the time that you sell your shares. This requirement is usually contained in the By-laws or Stockholders Agreement. 

So…What Will this Cost Me?

The total cost to complete a share transfer will depend on: (1) your company’s restrictions and (2) which secondary marketplace you use to complete the transaction. Typically, the secondary marketplace will not charge you to review your documents or list your shares for sale. If you complete a transaction through the marketplace, then the marketplace will charge you a fee based on a percentage of your sale price (usually 5%-10%). Additional costs may be incurred on account of a transfer fee charged by the company (typically between $1,000-$5,000) and a lawyer fee to prepare a legal opinion (typically between $1,000-$2,000).  

To Sum it All Up

While selling private shares is more complicated than selling publicly-traded shares, it is by no means impossible. Understanding the rights and restrictions attached to your private shares will help you considerably in determining whether you can sell your shares and what price you can command. In addition, partnering with the right secondary marketplace can be an invaluable resource in securing company approval and making the share transfer process as smooth and hassle-free as possible. 
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