Lock Down all the IP

One of the most important things founders of a startup have to do is make sure that everyone, and I repeat everyone, that has performed services, or provided goods, ideas, etc. to and for the company  signs an assignment form transferring any and all such interests to the company.  This can be done in connection with a subscription agreement or stock purchase agreement where the founders are receiving shares, or in connection with an employment/contractor agreement for previous and/or current employees or contractors.

The nightmare situation, and one that does still occur, is that a few years after a company begins to make substantial revenue, a person will claim that they are entitled to a portion of the ownership of the company based on what they performed prior to the company being formed (whether it be a design, software programming, idea, etc.).  The company is in the position of either having to give up some ownership of the company, thereby diluting the current owners interests, or the company has to take a stand, hire a litigator and defend any action in court.   This issue has been on the front of people’s minds due to the recent Zuckerberg portrayal.

It’s easy to prevent this.  Get those assignments signed and lock down all of the intellectual property as soon as you form your business entity.

Issuing Stock Options: Basics

There are qualified (a.k.a. “incentive”) stock options plans as well as non-qualified stock option plans. The basic difference is that incentive stock options receive special tax treatment, which is better from an employee’s perspective, but not necessarily from the company’s.

Incentive stock options are available for issuance only to employees. No income is reported when the employee exercises the option (with some AMT considerations), and the entire gain when the stock is sold can be taxed as long term capital gains (instead of regular income). Also, incentive stock options must be nontransferable, and exercisable no more than 10 years from grant, with an exercise price at least equal to the FMV at time of grant.

Non-qualified stock options result in taxable income to the recipient at the time they are exercised in the amount of the difference from the exercise price and the market value when exercised. Employers prefer non-qualified stock options because the company receives a tax deduction equal to the amount the stock receipient is required to include as income – the company is not allowed this deduction when using incentive stock options. Nonqualified stock options are issuable to anyone, may or may not have an exercise price and are transferable. We’ll explore the details in later posts.