Texas Lawyer for Equity Ownership

The first matter to understand is how your employer’s business is organized. The most basic is the “corporation,” which describes most companies. If you watch the stock market, you already know that publicly-traded corporations sell shares of stock to raise capital. Within the entire pool of stock shares, often there are different classes of stock, with some classes being more important, more valuable, or with more rights than others. For example, some shares may carry only equity or ownership rights but no voting rights. Or some classes may have preference at the time of pay-out. Also, the shares may be restricted as to how, when, or to whom they may be sold.

Corporations create a certain number of shares that can be issued. The entire pool of one-hundred percent of stock is comprised of outstanding shares and issued shares. Some of the outstanding shares may be reserved. You want to know how many shares exist. In other words, you need to know what percentage your shares of stock are of the whole. Sometimes corporations will later create additional shares to raise capital, which then dilutes the percentage of ownership. Also, corporations can have differing tax structures, such as a C corporation versus an S corporation.

Employees often receive stock options, which are the option to purchase equity in the company, shares of stock, at a heavily discounted price. You need to know the exercise price, the period during which you can exercise an option, and when the options expire. Stock options typically are granted in “installments,” an increasing percentage of the options becoming vested over a period of years. This is called a vesting period. You own only vested options. Unvested options are not yours until a certain condition is satisfied, such as remaining employed for a certain time period. Even if you achieve vested options, they still can carry limitations such as “vested shares repurchaser rights” by the corporation, claw backs, non-competition restrictions on equity, or other negative restrictions. There are different types of options, including “non-qualified” stock options, “incentive” stock options, “restricted stock units,” and “stock appreciation rights,” which have different tax consequences that you need to understand.

Another important fact is whether the owners either plan to sell their business or are open to selling sometime in the future. If there may be a change in control of the company in the future, you need to understand your rights and limitations if that event occurs.

Over the decades that the body of corporate law has grown, many other nuances have become embedded in the law of corporate ownership, especially tax ramifications. This is a treacherous area.