Legal Question in Securities Law in California
Consultant - stock option
How to compensate a consultant if he also wants some stock options?
We're a startup.
1 Answer from Attorneys
Re: Consultant - stock option
First, I assume the consultant is working for a corporation. Here are a few considerations; they are far from exhaustive.
1. The option contract should be in writing and be approved in advance by the corporation's board of directors. In rare instances, an officer of the corporation may have sufficient authority acting alone.
2. Consideration should be given as to whether the shares to be granted under the option will be newly-issued or treasury shares.
3. If the shares will be newly issued, the corporation must have authority to issue enough shares fully to honor the future exercise of the option(s). If the charter authorizes it to issue up to 10,000 shares, and 9,900 shares are already issued and outstanding, don't grant options that create a total possible demand exceeding 100 shares.
4. There may be a duty to disclose relevant information to the optionee, and to keep that information up-to-date while the options are "open" and subject to possible exercise. The extent of the duty depends upon whether the consultant is an insider and other factors. In general, the company should probably give the consultant the equivalent of what would constitute a private placement memorandum.
5. There are tax issues, among them the matter of what the options are worth at the time of grant and how to report that value by W-2 or, more likely, 1099.
6. The options need to be reflected in the corporation's income statement, balance sheet, corporate minutes (probably), and shareholder records kept by the secretary.
7. The agreement to grant options and the options themselves are probably two (or more) separate documents, which must be consistent with one another and absolutely crystal clear, especially as to when the options are granted, whether they vest at once or later, how they may be exercised, when they lapse, the strike price, and any circumstance under which the options become void, such as disloyalty.
8. If the corporation has buy-sell agreements, preemptive rights, or other special arrangements with its present shareholders, their rights when someone else becomes a shareholder must be examined and considered.
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